Moody’s warns on Turkey’s foreign currency deposits in downgrade

Ratings agency Moody’s warned that the risk of Turkey intervening to prevent the withdrawal of foreign currency deposits is increasing.

Turkey could take the step as the central bank’s foreign currency reserves come under further pressure, Moody’s said in a statement. Consequently, the agency lowered Turkey’s country ceiling for long-term foreign currency bank deposits to B2 from B1, two steps below the country’s junk sovereign rating.

“Turkey's central bank reserves remain very low by comparison to currency debt payments falling due over the next year, in particular by the banks and non-financial private sector companies, and continue to shrink,” analyst Kristin Lindow said. “Moody's expects this negative trajectory to continue in the months ahead in view of the large external debt repayments coming due. Turkish firms owe about $220 billion in unhedged foreign currency loans.

“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.”

Turkey’s central bank has been forced to use its foreign currency reserves to finance the current account deficit, which has widened to more than 6 percent of GDP. The bank has spent the cash in the absence of other sources of funding, such as inflows of capital for direct investment and purchases of stocks and bonds.

The bank’s gross reserves, including foreign currency and gold, have shrunk by more than $20 billion to $87.6 billion this year, according to data published on its website. Its net reserves, which exclude gold and the foreign currency assets held by banks at the central bank, are estimated at less than $20 billion.

Moody’s said the decision also reflects 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.”

Earlier in September, President Recep Tayyip Erdogan issued the decree stipulating that property and vehicle leasing contracts be denominated in liras to help bolster the currency’s value. The lira has slumped about 40 percent against the dollar this year.

“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,” Moody’s said.
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