ISTANBUL (CIHAN)- Most of the recent increase in Turkey's external debt has been driven by bank borrowing, international rating agency Fitch Ratings said on Wednesday.
Turkish banks' foreign borrowings increased almost threefold, to $164 billion, between the end of 2008 and the end of the first half this year, rising to 38 percent from 20 percent of the country's total external debt, Fitch said. Sovereign external debt rose more moderately and other sectors' foreign borrowings were largely unchanged, according to Fitch. The agency said the banks accounted for 71 percent of the increase in Turkey's foreign debt during the period. "The rapid rise in banks' foreign liabilities, particularly at the short end, leaves them more vulnerable to an extreme stress involving an abrupt and prolonged market shutdown," the agency warned in their note. Fitch indicated that the increase in external debt was one of the factors leading to the downgrade of Turkey's three largest banks in June. "Furthermore, banks accounted for virtually all the increase in foreign-currency external debt, as the growth of sovereign external liabilities mainly arose from greater foreign holdings of lira-denominated government bonds," Fitch added.
The short-term component of banks' external foreign-currency liabilities also increased significantly, more than quadrupling over the same period, while long-term foreign-currency debt doubled, Fitch said, adding: "The substantial short-term component within banks' debt raises refinancing risks." Fitch said although the drawdown of foreign-currency reserves placed against local-currency liabilities (the reserve option mechanism, or ROM), should provide banks with a certain amount of foreign-currency liquidity, further vulnerabilities could put pressure on banks' ratings.
"Other aspects of banks' credit profiles would probably also weaken if Turkey's external liquidity tightens significantly. Capital ratios would be likely to fall, asset quality deteriorate and profit margins shrink for all banks, not just the ones that have borrowed extensively from abroad. This may also increase pressure on bank ratings," it concluded.
Weak transparency hurt firms' ratings
In a separate report on Turkey on Wednesday, Fitch said Turkish privately owned businesses' ratings are constrained by poor corporate governance, including the absence of an independent board, weak transparency and limited disclosure practices.
"Although corporate governance practices are steadily improving in Turkey, through the implementation of 2012 commercial code and other incentives regulations introduced by Capital Market Board, a move in company culture toward more independency, transparency and disclosure could still take some time, specifically for privately owned corporates that are still to adopt these practices," the agency warned.
Lagging governance standards can discourage international investors from looking for opportunities in Turkey as they face closely controlled company ownership and general lack of transparency, Fitch stressed.
(Cihan/Today's Zaman) CIHAN