Turkish stocks fall as banks put on Rating Watch Negative by Fitch

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Traders work at their desks on the floor of the Borsa Istanbul in Istanbul on May 22, 2018. Turkey's embattled currency, the lira, has hit new historic lows against the US dollar after Fitch ratings agency expressed concerns over the central bank's independence in the wake of comments by President Recep Tayyip Erdogan. / AFP PHOTO / OZAN KOSE

The Turkish stock exchange’s 100 Index and the lira closed the week in poor condition after a promising but brief recovery in advance of presidential and parliamentary elections on June 24.

A Fitch Ratings report that takes some Turkish banks to rating watch negative led to a continuation of the falling of Turkish banks’ shares for a fourth day, Bloomberg reported on Friday.

“The Rating Watch Negatives placed on all Turkish banks’ Viability Ratings reflect risks to their performance, asset quality, capitalisation and, in most cases, liquidity and funding profiles following a recent period of increased market volatility,” a Fitch press release said.

“This has seen the Turkish lira depreciate against the US dollar-euro basket by about 20 percent this year with the authorities responding by raising the key policy rate by 3 percent to 16.5 percent,” it added.

In the last four days, the Borsa İstanbul Banks Index has dropped 11 percent, the largest decrease since July 2016, according to Bloomberg, while the Borsa İstanbul 100 Index also decreased around 4 percent this week.

In response to rumors surrounding the Fitch report, Mehmet Ali Akben, head of the Banking Regulation and Supervision Agency (BDDK), said Turkish banks were strong enough to protect themselves against conjunctural fluctuations.

“The Turkish banking sector always defeats speculation and perception operations,” Akben told the Anadolu news agency on Friday.

However, investors seemed to think that the problems were structural.

“Turkey is fragile with loads of dollar loans, it needs to attract foreign direct flows and in the long-term, needs structural reforms, which is not happening. All of which sends investors to the sidelines until there’s clarity after elections,” said Michel Danechi, a fund manager at Vedra Partners in London, citing Bloomberg.

“The still significant fall in the exchange rate, the rise in the interest rate (and the stated readiness of the Turkish authorities to raise this further if needed) and the negative impact of both of these on economic growth are likely to result in deterioration in banks’ financial metrics,” Fitch also said.

Elections aside, global investors also are looking forward to seeing inflation data that will be announced next week, while the Turkish lira lost 2.5 percent of its value on Friday after a brief recovery following moves by the Turkish Central Bank moves.

Deputy Prime Minister Mehmet Şimşek on Friday tweeted that “inflation is looks set to peak in a couple of months.”

The expectation for inflation at the end of the year has been recently revised to 11,50 percent from 10,15.

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