Moody's Investors Service has lowered Turkey's country ceiling for long-term foreign currency bank deposits to B2 from B1, the rating agency said on September 24.

Other ceilings are unchanged: the ceiling for short-term bank deposits remains Not Prime (NP); the foreign currency bond ceiling remains Ba2/NP; and the local currency country ceilings for bonds and deposits remain Ba1.

Moody’s rates Turkey at Ba3 with a negative outlook.

The forex liquidity risk of Turkish banks has heightened significantly amid the ongoing market volatility and currency weakness in Turkey and that is highlighted by recent deposit outflows, Fitch Ratings warned on September 24 in a report on Turkish banks’ external debt. 

Turkish residents’ total FX deposits with local lenders edged up by 1% w/w to $153bn as of September 14 from September 7's $151bn, which marked the lowest level since March 2017, according to central bank data released on September 20.

Moody's decision to lower the foreign currency deposit ceiling reflects the rating agency's view that the risk of the government intervening to prevent the withdrawal of foreign currency-denominated deposits in order to conserve Turkey's foreign currency reserves has risen. That in turn reflects recent and prospective pressure on those reserves, the large overall value of foreign currency deposits in the banking system relative to those reserves and the recent steep currency depreciation.

Very low reserves
Turkey's central bank reserves remain very low by comparison to currency debt payments falling due over the next year, in particular from the banks and non-financial private sector companies, and continue to shrink. Moody's expects this negative trajectory to continue in the months ahead in view of the large external debt repayments coming due.

The central bank's gross foreign exchange reserves declined by 2% w/w to $68.9bn as of September 14, the lowest level seen since April 2010, the national lender said on September 20.

Across one year, the Turkish private sector was facing repayments of $70.5bn for its loan debts as of end-July, up from $69.6bn at end-June, according to the latest data from the central bank. The sector was obliged to pay $6.71bn in August and $7.71bn in September. The highest scheduled amounts to be paid are $9.39bn in October and $7.81bn in May 2019.

By the end of 2018, the Turkish private sector’s scheduled total loan debt repayments amount to $34.7bn.

Moody’s decision to lower the foreign currency ceiling also reflected the ongoing weakening of Turkey's institutions and the increasingly unpredictable policy environment, as exemplified by the recent presidential decree forcing the redenomination of property contracts between Turkish entities, banning hard currency transactions.

The decision to lower the ceiling to two notches below the government bond rating reflected Moody's view that the government may come to conclude that inhibiting access to foreign currency deposits is necessary if pressures on the balance of payments and thereby on its own debt are to be alleviated. The risk that the government places constraints on deposit holders' access to their foreign currency deposits is therefore higher than the risk that it defaults on its own debt, according to Moody’s.

Turkey’s Akbank and Turk Eximbank have increased pricing on two syndicated loans to encourage international lenders to join the deals, banking sources told Reuters on September 4, with Turkey’s financial crisis showing no sign of abating.

Lenders in Turkey have to refinance $6.4bn of syndicated loans before the end of the year, according to LPC data, with the country’s corporates facing an uphill struggle to repay foreign currency-denominated debt.

Deposits fall amid volatility
Banks' FX deposits decreased by 6%, or $12bn, in July-August, with reductions of a similar magnitude recorded in both retail and corporate FX deposits, Fitch said, adding that most of the outflow occurred during the mid-August market volatility.

“The impact of the outflows on FX liquidity cannot be reliably assessed until full end-August sector data is released in early October, but risks for liquidity are high in case of large FX deposit outflows or a prolonged loss of market access,” the rating agency warned.

Data on Turkish banks' external debt—from end-June accounts—shows the extent of the sector's exposure to refinancing risk prior to the steep fall in the TRY in August. External debt was $183bn, with $102bn maturing within 12 months.

Turkey’s external debt maturing within one year or less regardless of the original maturity rose by 1% m/m to $181.3bn at end-July from $179.1bn at the end of June, according to the latest data from the central bank.

Fitch estimated, however, that refinancing needs net of relatively stable sources of funding, due within one year, were more moderate, at $50bn-$55bn, and that banks could have accessed about $86bn of FX liquidity at end-1H18. But refinancing risk has materially risen due to market volatility, rising funding costs, currency depreciation and shifts in investor sentiment, and it remains to be seen whether the banks will be able to refinance on reasonable terms.

Turkey's total reported gross external debt was $447bn at end-June. Banks remain Turkey's main borrowers, accounting for 41% of the country's foreign debt.

Fitch expects Turkey's current account deficit to narrow significantly, to $12bn in 2019 from $47bn in 2017, as slowing economic growth and a materially weaker lira suppress imports and boost exports. However, the country's financing requirement will remain large as a proportion of liquid foreign assets due to maturing external debt.