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Moody’s warns Turkey over vulnerabilities stemming from forex reserves

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Turkey’s foreign exchange reserves have fallen to a fresh 2019 low once short term borrowing is stripped out, new data showed on Thursday, as Moody’s issued a warning over the country’s mounting vulnerabilities, the Financial Times reported.

Official figures for the net foreign currency reserves held by Turkey’s central bank showed that the country’s hard currency war chest climbed to $27.2 billion in the week to May 10, up from $25.9 billion the previous week. However, when a large jump in short-term dollar borrowing is excluded, the figure was $12.7 billion — down from $14.2 billion the week before.

Investors have grown increasingly concerned in recent months about a sustained fall in net reserves, which have plummeted from a level of $35 billion in the last week of February, once short-term dollar borrowing is excluded.

Moody’s, the rating agency, warned in its annual credit analysis released on Thursday that net FX reserves are “quite low,” meaning the country’s central bank has “very little room . . . to react to large-scale currency weakness.”

Many analysts believe that the central bank has used its foreign currency reserves to indirectly intervene to prop up the ailing Turkish lira.

Meanwhile a senior Moody’s analyst told Reuters that Turkey needs to put a comprehensive and credible economic plan in place if it is to avoid another cut to its sovereign credit rating.

New analysis from the rating agency shows Turkey’s recession, the slump in the lira, upcoming refinancing pressures and dwindling reserves have pushed it to right near the top of its worldwide external vulnerability index.

“Failure to put forward a credible broad-based plan to address the structural issues, and in the near-term dampen the market volatility pressure on the lira … that would be a pressure point from a rating perspective,” Moody’s Managing Director of Sovereign Risk Yves Lemay said.

Moody’s downgraded Turkey to Ba3 — three rungs into junk territory — last August, but it also kept it on a “negative” outlook, which is a warning that another cut could take place in 12-18 months’ time.

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