Turkish corporates are cutting the proportion of their debt denominated in foreign currencies and are holding more foreign exchange, Fitch Ratings said on Tuesday.
But borrowing in foreign currency is still widespread and is not always adequately hedged or matched by foreign currency revenues, Fitch said.
“Emerging market corporates face the risk of potential strengthening of the U.S. dollar. Turkish corporates have historically been among the most exposed to these risks,” it said.
Turkey’s lira has slipped to successive record lows against the dollar over the past two years, rendering foreign currency borrowing more expensive to repay. The lira was trading at 8.63 per dollar on Wednesday, near a record low just beyond 8.8 per dollar reached in early June.
Fitch said hard currencies accounted for an average 70 percent of debt but only 46 percent of revenue among the Turkish companies it had studied.
“Turkish corporates’ exposure to FX risks has been highlighted by severe Turkish lira depreciation over the past decade, including during the 2013 ‘taper tantrum’ and further bouts of volatility since 2018,” Fitch said. The U.S. Federal Reserve looks set to begin another taper of its asset purchase programme around the end of the year, it said.
“If the lira deteriorates, companies with a mismatch may need to service inflated foreign currency-denominated debt with local currency revenues,” the ratings agency said. “Risks can be exacerbated when this debt is short term, as companies are more likely to find themselves having to physically repay debt with foreign currency, using cash or accommodative financing.”
Aggregate foreign currency debt has declined to 53 percent of total unadjusted debt from 71 percent since the end of 2017. The proportion of hard currency revenues has risen to 31 percent from 26 percent, Fitch said. Turkish firms have also increased their cash holdings to 28 percent of aggregate revenue from 21 percent, it said.
The proportion of this cash held in hard currencies has also risen to 76 percent from 55 percent in 2017, Fitch said. That should help strengthen liquidity should market disruptions occur, it said.