Fitch lowers outlook on Turkey to negative

Fitch ratings agency downgraded the outlook on Turkey's Long-Term Issuer Default Ratings (IDRs) to negative from stable on Friday and affirmed the IDRs at 'BB-'.

The revision of the outlook was mainly due to Turkey's depletion of foreign exchange reserves, weak monetary policy credibility, negative real interest rates, and a sizeable current account deficit partly fuelled by a strong credit stimulus - which have exacerbated external financing risks, Fitch said

“Political pressures, the limited independence of the Central Bank of the Republic of Turkey (CBRT), and a track record of being slow to respond to events, increase the risk that policy is tightened insufficiently, contributing to further external imbalances, market instability, and a more disorderly adjustment,” it added.

Fitch said Turkey’s large currency interventions to defend the lira, which has depreciated 16 percent against the U.S. dollar since March on the back of net capital outflows and a worsening trade deficit, had weakened policy credibility.

It said Turkey’s gross FX reserves (including gold) fell to $88.2 billion in mid-August from $105.7 billion at end-2019. This fall happened despite a $40.5 billion boost from additional FX swaps as a result of regulatory limits on banks dramatically shrinking the offshore swap market and a $10 billion increase in the swap line with Qatar, Fitch said.

The sharp fall in Turkey’s real interest rates, from a peak of 8.3 percent in June 2019 to minus 3.5 percent, “has further weakened disinflation prospects and monetary policy credibility,” Fitch said..

Turkey’s current account balance deteriorated to a deficit of $19.7 billion in 1H20 from a surplus of $8.7 billion in 2019. This was driven by strong credit growth, a shallower recession in Turkey than its main trading partners, and the collapse in tourism due to the COVID-19 pandemic, with some offset from low energy prices, Fitch said.

Fitch forecasts that the Turkish economy will contract by 3.9 percent in 2020, but predicts GDP growth of 5.4 percent in 2021 supported by recovery in investment and tourism, and a boost to net exports.