Moody’s sees big rise in Turkey’s problem loans, slashes economy forecast

Moody’s predicted a large increase in problem loans for Turkish banks and slashed its predictions for economic activity in the country.

Banks with high exposure to small and medium-sized enterprises, along with the tourism and transportation industries, will be particularly affected, the ratings agency said in a report on Monday.

“Problem loans will increase considerably in 2020, from 5 percent of loans in 2019,” Moody’s said. “Risk aversion among international investors will translate into constrained market access for Turkish banks, partly offset by lower loan demand.”

Turkey is seeking to boost lending by state-run banks under control of the country’s wealth fund, while punishing non-government banks who fail to meet lending goals. Meanwhile, the central bank has slashed interest rates to 8.25 percent, below annual inflation of 10.9 percent, from 24 percent in July last year, in an effort to stimulate economic activity.

Moody’ said the measures will not prevent economic contraction this year. It said that Turkey’s economy would probably shrink by 5 percent this year, in line with a forecast by the International Monetary Fund. It had previously predicted a contraction of 1.4 percent.

The ratings agency said lower lending volumes for banks and higher provisions for loan-losses would pressure profitability, while there would be additional capital strain caused by currency depreciation.

“The authorities' support measures will only partly offset the weakening of the credit profiles of Turkish banks,” it said.

The government has extended a programme of Treasury guarantees on loans by banks to the business world. The measures are a continuation of steps made after a currency crisis in 2018, which sent the economy spiralling into a recession.

On Monday, Turkey’s three main state-run banks said they would extend loan facilities provided during the COVID-19 pandemic with lower interest rates. The lenders will offer mortgage loans with a maturity of 15 years with a monthly interest rate of 0.64 percent and a grace period on repayment of up to 12 months.

The lira hit an all-time low of 7.269 per dollar early in May, beating a low set during the currency crisis. It has since recovered to trade at around 6.8 per dollar, but is still down 13 percent against the dollar this year. The lira had traded at 4.59 per dollar in July 2018, just before the currency crisis struck.

Banks in the country will also suffer from capital raising constraints this year, Moody’s said.

“Turkish banks are dependent on short-term wholesale funding in foreign currency, and that current risk aversion among international investors will translate into constrained market access for Turkish banks, exacerbating their funding vulnerability,” Moody’s said.