High inflation in Turkey warns of more losses for Gulf banks

A general view of Emirates NBD on January 3, 2017 in Dubai, United Arab Emirates.

Tom Dolat | Getty Images

Dubai, United Arab Emirates – Banks dealing with Turkey have faced losses since the country’s currency began to decline sharply in 2018; Now, lenders in many of the oil-rich Gulf states in particular are set to take a hit next year due to their ties to the country, according to a recent report by rating agency Fitch.

Fitch wrote this week that banks in the Gulf Cooperation Council countries – i.e. Bahrain, Kuwait, Oman, Qatar, Saudi Arabia and the United Arab Emirates – with Turkish subsidiaries had to adopt “hyperinflation reports” in the first half of 2022, with cumulative inflation in Turkey overtaking Over the past three years a whopping 100%.

Fitch calculates that Gulf banks with Turkish subsidiaries recorded net losses of nearly $950 million in the first half of this year. Emirates NBD – Dubai’s leading bank – and Kuwait Finance House, Kuwait’s second-largest bank, were among the hardest hit. The Turkish exposure of KFH and Emirates NBD is 28% and 16% of their assets respectively. Qatar National Bank was among those affected.

“Fitch has always viewed the exposure of Turkish Gulf banks as credit negative,” the rating firm wrote. “Turkish exposures pose a risk to the capital positions of GCC banks due to currency translation losses from the devaluation of the lira.”

lira It lost 26% of its value vs. dollar Year-to-date, making imports and purchasing essential goods more difficult for Turkey’s 84 million people.

Why is the Turkish currency declining?

This time five years ago, one dollar bought nearly 3.5 Turkish liras. Now, the dollar buys about 18 liras. The slide began as Turkey’s economy grew rapidly but its central bank refused to raise interest rates to calm rising inflation. That and things like a worsening current account deficit, shrinking foreign exchange reserves and rising energy costs—plus occasional disagreements with the United States that almost led to sanctions on Turkey—have added to the pressure on the currency.

Turkish lira and US dollar

Risol Kaboglu | NurPhoto via Getty Images

Billions of losses

in the middle of August, Turkey shocked markets with its key interest rate cut By 100 basis points – from 14% to 13% – despite inflation at nearly 80%, the highest level in 24 years. Analysts say that with few solutions to the lira’s problems on the horizon, banks with Turkish exposure will see more problems.

“We calculate that the total currency conversion losses of GCC banks through ‘Other Comprehensive Income’ amounted to $6.3 billion in 2018-2021, mainly due to the depreciation of the lira,” Fitch wrote, adding that the total net income of the banks’ Turkish subsidiaries , meanwhile, was just over half that amount at $3.3 billion.

“We expect currency losses to remain high until at least 2024 due to further depreciation of the lira,” the agency wrote.

Turkish President, Recep Tayyip Erdogan, arrived in Abu Dhabi as part of his visit to the United Arab Emirates on February 14, 2022 in Abu Dhabi, United Arab Emirates.

Presidential Press Office | Pictures of Dia via Getty Images

However, Fitch does not see itself compelled to lower the viability ratings of GCC banks with Turkish subsidiaries, saying: “These banks have a good capacity to absorb losses.”

Nor does it expect them to leave Turkey entirely, in large part because there are not enough potential buyers, despite Turkish banks trading at half their original book value.

“GCC banks will be willing and able to provide their Turkish subsidiaries with financial support, if needed, and this is reflected in the ratings of the subsidiaries,” Fitch wrote, adding that their outlook for their exposure remains credit negative in particular due to the increased risk of government intervention in banks. Turkish.

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