Economy
Fitch sees modest margin recovery for Turkish banks as rate cuts loom
Türkiye’s banking sector may see a gradual recovery in net interest margins by the end of the year, aided by anticipated monetary easing from the country’s central bank, according to Fitch Ratings.
Ahmet Emre Kılınç, director of banks at Fitch, said on Tuesday that the credit ratings agency now projects the Central Bank of the Republic of Türkiye (CBRT) to lower its benchmark interest rate to 33% by year-end.
“As a result, we expect an improvement in banks’ net interest margins, although this recovery will be somewhat more modest compared to our initial projections at the beginning of the year,” Kılınç told Anadolu Agency (AA).
The CBRT pivoted to raising its key policy rate by 350 basis points in April to 46% and pushed the overnight lending rate to 49% after Turkish assets and the lira fell sharply after Istanbul Mayor Ekrem Imamoğlu was jailed pending trial over graft charges.
Before that, the bank had begun an easing cycle and gradually cut its one-week repo rate to 42.5% in March as inflation fell from the level of more than 75% that it reached in May 2024.
A sharper-than-anticipated slowdown in annual inflation to 35.41% has reignited speculation that the bank could resume rate cuts as early as this month.
The outlook for Turkish banks is shaped by domestic market developments and the impact of global customs tariffs, Kılınç said.
Before March, he noted, there was an expectation that continued rate cuts would support banks’ interest margins, but this has been somewhat delayed due to volatility in the domestic market.
Eyes on policy path
While the CBRT has signaled a cautious approach, analysts say the decline in inflation has provided some additional room for the bank to resume the rate cuts. Any shift, however, will likely be contingent on whether the overnight lending rate converges with the policy rate in the coming weeks.
The CBRT’s next monetary policy committee (MPC) meeting is scheduled for June 19, followed by another on July 24.
Last month, the bank kept its inflation forecast steady in its quarterly report, saying upward and downward risks balance out. Governor Fatih Karahan said the bank is ready to tighten policy if inflation worsens.
The bank’s year-end mid-point estimate stands at 24%, with an upper band of 29%. Turkish officials continue to emphasize that inflation will remain within this forecast band. Market surveys see a higher rate of around 30%, though estimates have recently been revised down modestly.
Kılınç highlighted that the persistence of high interest rates leads to increased risk costs.
“We have begun to closely monitor banks’ asset quality for the second half of the year. Currently, we believe that the risks to asset quality remain manageable for banks. In this regard, we maintain our neutral outlook for Turkish banks from the beginning of the year,” he said.
Fitch’s operating environment score for the Turkish banking sector remains positive, and the agency is keeping it unchanged, according to Kılınç.
“Profitability could improve this year. However, recent market volatility has somewhat disrupted the positive trajectory. Due to this volatility, Türkiye’s five-year credit default swap (CDS) had risen, but has since declined again to around 300 basis points,” he added.
External financing access remains intact
Despite concerns over short-term external debt levels, Turkish banks have retained strong access to foreign financing, according to Kılınç.
He pointed out that the high level of short-term external debt poses a refinancing risk, though he emphasized that this is not a new concern.
“Last year, market access was strong, with many banks issuing both Eurobonds and subordinated loans. Since March, syndication loans have been renewed at rates exceeding 100%, indicating that banks continue to secure external financing,” Kılınç said.
“However, long-term bond issuances have slowed, with costs being a key factor. In this context, banks are likely to wait for a more favorable environment before proceeding with further issuances.”
Kılınç also mentioned that global developments, including U.S. interest rate policy, geopolitical risks, and tariffs, could indirectly impact the outlook for Turkish banks. However, he emphasized that tariffs were unlikely to have a significant direct effect on Turkish financial institutions.
U.S. inflation picked up slightly in May as food costs rose, though overall inflation remained mostly tame, official data released by the Labor Department revealed.
Consumer prices increased 2.4% in May compared with a year ago, according to the report released Wednesday. That is up from a 2.3% yearly increase in April. Excluding the volatile food and energy categories, core prices rose 2.8% for the third straight month. Economists pay close attention to core prices because they generally provide a better sense of where inflation is headed.
The figures suggest inflation remains stubbornly above the Federal Reserve’s (Fed) 2% target, which makes it less likely that the central bank will cut its key short-term interest rate. U.S. President Donald Trump has repeatedly urged the central bank to reduce borrowing costs.
Senior U.S. and Chinese negotiators have agreed on a framework to get their trade negotiations back on track after a series of disputes that threatened to derail them, both sides said at the end of two days of talks in London, which wrapped up late Tuesday.
The meetings appeared to focus on resolving disputes over mineral and technology exports that had shaken a fragile truce on trade reached in Geneva last month. It was not clear whether progress was made on the more fundamental differences over China’s sizeable trade surplus with the United States.
“First, we had to get sort of the negativity out and now we can go forward,” U.S. Commerce Secretary Howard Lutnick told reporters after the meetings.
Asian stock markets rose Wednesday after the agreement was announced.
The talks followed a phone call last week between U.S. President Donald Trump and Chinese leader Xi Jinping to try to calm the waters.
Li Chenggang, a vice minister of commerce and China’s international trade representative, said the two sides had agreed in principle on a framework for implementing the consensus reached on the phone call and at the talks in Geneva, the official Xinhua News Agency said.
Further details, including any plans for a potential next round of talks, were not immediately available.
Li and Wang Wentao, China’s commerce minister, were part of the delegation led by Vice Premier He Lifeng. They met with Lutnick, Treasury Secretary Scott Bessent and Trade Representative Jamieson Greer at Lancaster House, a 200-year-old mansion near Buckingham Palace.
Wendy Cutler, a former U.S. trade negotiator, said the disputes had frittered away 30 of the 90 days the two sides have to try to resolve their disputes.
They agreed in Geneva to a 90-day suspension of most of the 100%-plus tariffs they had imposed on each other in an escalating trade war that sparked fears of recession. The World Bank, citing a rise in trade barriers, cut its projections for U.S. and global economic growth on Tuesday.
“The U.S. and China lost valuable time in restoring their Geneva agreements,” said Cutler, now vice president at the Asia Society Policy Institute. “Now, only sixty days remain to address issues of concern, including unfair trade practices, excess capacity, transshipment and fentanyl.”
Since the Geneva talks, the United States and China have exchanged angry words over advanced semiconductors that power artificial intelligence, visas for Chinese students at American universities and rare earth minerals that are vital to carmakers and other industries.
China, the world’s biggest producer of rare earths, has signaled it may speed up issuing export licenses for the elements. Beijing, in turn, wants the U.S. to lift restrictions on Chinese access to the technology used to make advanced semiconductors.
Lutnick said that resolving the rare earths issue is a fundamental part of the agreed-upon framework, and that the U.S. will remove measures it had imposed in response. He did not specify which measures.
“When they approve the licenses, then you should expect that our export implementation will come down as well,” he said.
Cutler said it would be unprecedented for the U.S. to negotiate on its export controls, which she described as an irritant that China has been raising for nearly 20 years.
“By doing so, the U.S. has opened a door for China to insist on adding export controls to future negotiating agendas,” she said.
In Washington, a federal appeals court agreed Tuesday to let the government keep collecting tariffs that Trump has imposed not just on China but also on other countries worldwide while the administration appeals a ruling against his signature trade policy.
Trump said earlier that he wants to “open up China,” the world’s dominant manufacturer, to U.S. products.
“If we don’t open up China, maybe we won’t do anything,” Trump said at the White House. “But we want to open up China.”
U.S. Treasury Secretary Scott Bessent has been floated as a potential successor to Federal Reserve (Fed) Chair Jerome Powell, a report said on Tuesday.
The report by Bloomberg News cited sources familiar with the matter, a claim the White House immediately denied.
Bessent joins a small list of Fed chair candidates that has included Kevin Warsh, a former Fed official whom President Donald Trump previously interviewed for Treasury secretary, Bloomberg added.
A White House official dismissed the report as false.
Trump said on Friday he would name a successor to Powell very soon. Bloomberg, citing two unidentified people familiar with the matter, reported that formal interviews for the job have not begun.
Bessent is leading Trump’s sweeping global trade overhaul and has a hand in pushing for changes to taxes and regulations.
Türkiye is drawing up a plan to relocate industrial zones in Istanbul to more disaster-resilient areas as part of a strategy to mitigate the economic fallout of a possible major earthquake in the region, a report said on Wednesday.
The plan comes amid rising concerns about the long-anticipated Istanbul earthquake, which experts say could pose a severe threat not only to the metropolis’ population but also to the country’s industrial base.
A magnitude 6.2 tremor rattled the city this April, reviving memories of a historic quake that devastated the country’s southeast two years ago and raising anxieties about the city’s lack of preparedness.
The quake marked the biggest in years in Istanbul, which straddles the Bosporus dividing Europe and Asia and sits just north of a fault line crossing the Marmara Sea.
A significant share of Türkiye’s manufacturing and exports are concentrated in and around the Istanbul metropolitan area, zones that are highly vulnerable to seismic activity.
Any disaster would stagger Türkiye’s economy, given that the broader Marmara region accounts for more than 40% of the national gross domestic product (GDP).
There are nine industrial areas in Istanbul, according to OSBÜK, the umbrella organization representing the zones.
The Industry and Technology Ministry’s 2030 Industrial Strategy includes a dedicated chapter on earthquake resilience.
The new plan will prioritize risk analysis of existing industrial areas, followed by the identification of relocation zones that meet stringent disaster-resilience standards, a report by private broadcaster NTV said.
Quake-resilience will be a primary criterion and new industrial zones will be developed with robust infrastructure and modern safety standards, it noted.
Where relocation is not feasible, authorities plan to reinforce existing industrial facilities to improve their earthquake resistance.
The envisioned industrial areas will be strategically placed with rail and port connections, according to the report.
To facilitate this, the government will encourage private-sector investment and explore alternative financing models.
An International Monetary Fund (IMF) delegation visited Syria for the first time in 15 years, signaling renewed engagement with the war-torn nation following the fall of Bashar Assad and years of devastating conflict, the IMF said Tuesday.
The team traveled to Damascus from June 1 to 5 to assess economic conditions and discuss priorities with Syrian officials as the country seeks to rebuild after more than a decade of war.
“Syria faces enormous challenges following years of conflict that caused immense human suffering and reduced its economy to a fraction of its former size,” said Ron van Rooden, who led the IMF mission.
The country’s economy has been severely battered, with millions displaced and much of its infrastructure destroyed. Roughly six million Syrians have fled the country, while another seven million remain internally displaced, van Rooden noted.
“Output has plummeted, real incomes have fallen sharply, and poverty rates are high,” he added. “State institutions have also been weakened, and the destruction of infrastructure has left deep scars.”
The civil war began in 2011 after a violent crackdown on pro-democracy protests. Assad was ousted in December 2023 by a lightning offensive led by anti-regime forces. Syria’s new leadership has since sought to reestablish diplomatic and financial ties with international institutions.
The IMF said it aimed to explore how it could support Syria’s economic recovery and noted that urgent action is needed to stabilize the economy and rebuild public services.
The IMF’s last in-depth assessment of Syria’s economy was in 2009, prior to the onset of the conflict. In April, Saudi Arabia and Qatar announced they would jointly settle Syria’s $15 million debt to the World Bank. The move paves the way for renewed World Bank operations in the country, which were suspended at the start of the war.
The IMF called recent discussions with Syria’s economic team “useful” and said future engagement will focus on policies that support inclusive growth and rebuild economic institutions.
Trade talks with China were going well, U.S. Commerce Secretary Howard Lutnick said on Tuesday as the two sides met for a second day in London, seeking a breakthrough on export controls that have threatened a new rupture in fragile ties between the superpowers.
Having agreed to step back from a full-blown trade embargo at a first round of talks in Geneva in May, the two sides are now seeking agreement after they accused each other of trying to throttle supply chains with a raft of export controls.
White House economic adviser Kevin Hassett said on Monday that the U.S. could lift recently imposed export controls on goods such as semiconductors if China sped up the delivery of rare earths and magnets that are crucial to its economy.
The blow-up over rare earths, which has sparked alarm in boardrooms and factory floors around the world, came after last month’s preliminary deal in Geneva to cut tariffs, which eased investor fears that a trade war would lead to a global slowdown.
“(Talks went on) all day yesterday, and I expect them all day today,” Lutnick told reporters. “They’re going well, and we’re spending lots of time together.”
Trump’s shifting tariff policies have roiled global markets, sparked congestion and confusion in major ports, and cost companies tens of billions of dollars in lost sales and higher costs.
But markets have made up much of the losses they endured after Trump unveiled his sweeping “Liberation Day” tariffs in April, aided by the reset in Geneva between the world’s two biggest economies.
The second round of U.S.-China talks, which followed a rare phone call between Trump and Chinese President Xi Jinping last week, comes at a crucial time for both economies.
Customs data published on Monday showed that China’s exports to the U.S. plunged 34.5% in May, the sharpest drop since the outbreak of the COVID-19 pandemic.
While the impact on U.S. inflation and the jobs market has so far been muted, tariffs have hammered U.S. business and household confidence and the dollar remains under pressure.
Discussing disagreements
The two sides, led at the talks by U.S. Treasury Secretary Scott Bessent, Lutnick and U.S. Trade Representative Jamieson Greer, with the Chinese contingent helmed by Vice Premier He Lifeng, are meeting at the ornate Lancaster House in the British capital.
The talks ran for almost seven hours on Monday and resumed just before 10 a.m. GMT on Tuesday, with both sides expected to issue updates later in the day.
The inclusion of Lutnick, whose agency oversees export controls for the U.S., is one indication of how central rare earths have become. He did not attend the Geneva talks, when the countries struck a 90-day deal to roll back some of the triple-digit tariffs they had placed on each other.
China holds a near-monopoly on rare earth magnets, a crucial component in electric vehicle motors, and its decision in April to suspend exports of a wide range of critical minerals and magnets upended global supply chains.
In May, the U.S. responded by halting shipments of semiconductor design software, chemicals and aviation equipment, revoking export licences that had been previously issued.
Hassett said he expected any export controls from the U.S. to be eased and rare earths released in volume once the two sides had shaken hands in London.
But he said any easing would not include the “very, very high-end Nvidia stuff,” referring to Nvidia’s most advanced artificial intelligence chips that have been blocked from going to China over concerns about potential military applications.
“I’m talking about possible export controls on other semiconductors which are also very important to them,” he said.
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