Turkey Country Report Sep22 - September, 2022

September 5, 2022

Turkey on August 18 introduced another shock rate cut. The USD/Turkish lira (TRY) pair, which had been testing the 18-level for around a month, crashed through the 18/$ threshold towards 18.15.

Turkey’s monetary cycles are always identical. Lira loans are pumped in. The exchange rate becomes impossible to control. Backdoor tightening (or a shock rate hike) is introduced. More lira loans are pumped in.

It was in May that the palace administration decided there was no more FX left to keep the lira under control. Macroprudential measures and non-capital controls followed.

In July, the fresh lira loans flow slowed. Turkey’s “businessmen” were predictably in uproar. Exporters, meanwhile, have woken up to the fact that Europe has slowed down.

In August, loan rates entered a downward trend and the loan flow escalated.

In the coming period, the lira will be more exposed to new losses. The external balances at the same time will deteriorate further in parallel to loan growth.

Under normal conditions, the trade deficit is deducted from GDP. However, Turkey has been reporting a positive contribution from external trade for around two decades.

The government subsidises energy prices, the exchange rate and loan rates. As a result, economic activity simply produces a trade deficit.

In the coming period, the inflation dynamics will definitely deteriorate further. Even prior to the latest easing cycle, the lira was a clear candidate for a crash. Estimating the timing is, though, not possible.

The month of August usually brings about shaky markets as liquidity dries up during the vacation period. However, for the financial industry, August this year has proceeded in an extremely positive fashion (as positive as possible amid the global tightening) while the positive atmosphere on global markets faded away through the end of the month.

On September 21, the Fed’s open market committee is currently expected to deliver another 50bp rate hike.

Turkey has so far led the global inflationary period. Now, it will lead the stagflation/slumpflation period. For officials, the good thing is that Turkey’s official GDP figures are not affected by the ongoing tragedy in the real economy.

Turkey has reportedly become a big transit import route for sanctioned Russia. The US has sanctioned MMK Metalurji, the Turkey unit of steelmaker MMK (Moscow/MAGN).

Moody’s Investors Service downgraded Turkey’s sovereign rating by one notch to B3 with a stable outlook.

Currently, Fitch Ratings rates Turkey at B/Negative, five notches below investment grade. Moody’s Rating Services rates Turkey at B3/Stable, six notches below investment grade, while Standard & Poor’s has Turkey at B+/Negative, four notches below investment grade.

More downgrades are on the way.

Dollarisation in Turkey is running at record-breaking levels.

TSKB concluded the spring season for Turkish banks’ syndicated loan renewals.

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