Mar 29 2019

Turkey spiralling into deep economic crisis - Daily Telegraph

Turkey is spiralling into deep economic crisis as foreign exchange reserves deplete and over fears of a possible credit crunch, British newspaper the Daily Telegraph said on Friday

Turkish lira fell more than 4 percent last Friday after reports of an unexpected fall in the central bank’s foreign reserves. The bank temporarily stopped lending at its benchmark rate of 24 percent, while its attempts to defend the lira spiked the overnight offshore swap rate above 1,300 percent this week.

Turkish banks began lending in the market again on Thursday and rates returned to levels of as low as 50 percent, but the lira slumped more than 5 percent after central bank data showed that its reserves had fallen by almost $10 billion in three weeks. Turkey needs to repay or refinance roughly $150 billion of short-term debt within 12 months, while the net reserves of the central bank has fallen to $26 billion, the Daily Telegraph said.

William Jackson from Capital Economics said Turkey had the thinnest reserve cover in the emerging market universe, while banks face a mountain of repayments in April, May and June, while the cost of market refinancing had risen by 200 basis points in one week. “It may prove prohibitively expensive for some banks to roll over their debts,” he said. 

While markets worry that Turkey might face a credit crunch if banks are forced to sell foreign currency assets, shrinking their balance sheets, credit default swaps measuring bankruptcy risk for Turkish state debt have increased 150 basis points to 454 over the last week, the Daily Telegraph said. 

Italian bank UniCredit estimates that the Turkish economy will contract by 5 percent in 2019. Turkey’s economy shrank by 2.4 percent on a quarterly basis in the three months to December after a 1.6 percent contraction in the third quarter. 

The Center for Strategic and International Studies (CSIS) warned last week that Turkey might find itself in an L-shaped recessionary phase and the economy might not bounce back as quickly as it did in previous recessions with a V-shaped recovery.