Indebted Turkish firms left exposed by weak policy, Fed taper - Fitch

Turkey’s weak monetary policy credibility, rising global inflation and expectations that the U.S. Federal Reserve will taper its asset purchase programme mean indebted Turkish companies are particularly vulnerable to currency volatility, Fitch Ratings said.

“Turkish corporates’ widespread use of foreign-currency borrowing makes them among the most exposed in EMEA to exchange rate movements,” Fitch said in a report on Wednesday.

“The country’s historically weak monetary policy credibility has previously exacerbated such movements, and the risk has increased following the removal of the central bank governor earlier this year,” Fitch said.

Turkey’s lira hit a record low beyond 8.8 per dollar at the start of June on concerns among investors that the central bank will cut interest rates prematurely. President Recep Tayyip Erdoğan has called on the bank to reduce borrowing costs in July or August. He sacked and replaced the bank’s governor in mid-March after he raised interest rates to 19 percent to defend the lira and rein in double-digit inflation.

Fed officials signalled on Wednesday that they expect to raise interest rates by late 2023, sooner than previously anticipated. Expectations for higher U.S. rates reduce the allure of emerging market assets.

Hard currency accounts for an average of 70 percent of Turkish corporate debt, but only 46 percent of revenue, Fitch said.

“Turkish corporates are often more dependent on short-term funding than international peers and frequently only have access to uncommitted bank lines,” it said. “This can leave them exposed to the risk of funding interruptions and market closures.

“We have not seen any significant change in companies' reliance on uncommitted lines. Nor has there been much change in the distribution of debt maturities, with issuers regularly needing to refinance debt maturing within 12 months.”

Fitch said Turkey’s sovereign debt rating has fallen to BB- over the past few years, pulling down the so-called country ceiling to the same level.

“Two thirds of corporate ratings are now at or above the country ceiling, meaning the portfolio is now more sensitive to sovereign rating changes,” it said. “However, it also means issuers are more likely to have strong credit metrics for their rating, meaning they should have more headroom as long as the sovereign rating remains unchanged.”

The lira was trading down 0.2 percent at 8.62 per dollar as of 10:31 a.m. in Istanbul on Thursday, stronger than the record low but weaker than a previous all-time low of 8.58 per dollar set in November.

The Institute of International Finance (IIF), an association representing the global finance industry, has set a fair value for the lira of 9.5 per dollar, citing Turkey’s current account deficit and an exodus of foreign portfolio investment.

Fitch said Turkish debt issuers have shown flexibility during previous periods of rapid currency depreciation and took steps to reduce their foreign currency exposure.

“In particular, the proportion of foreign-currency debt has declined and companies are holding more cash, with a greater proportion of that cash also in foreign currency,” it said.