International credit ratings agency Fitch Ratings’ top analyst Douglas Winslow stated that he did not foresee a financing problem for Turkey as a result of the country’s coronavirus and currency strains. Indeed, he said that Turkey’s relatively low debt levels and experience at riding out financial market turbulence is helping its credit rating withstand pressures.
Winslow said the already-junk BB rating’s main exposure to the problems was Turkey’s large external financing need relative to its low foreign exchange reserves, compounded by the weak credibility of its central bank. The coronavirus pandemic means Fitch now expects the economy to contract at least 2% in 2020 rather than see more vigorous growth, while the recent volatility of the Turkish lira has exhausted foreign exchange reserves and is making refinancing over USD 170 billion of dollar-denominated debt in the next 12 months a more daunting task.
Winslow added that for rating purposes, it would be worrying if external pressures were to feed through to more acute financing stress for banks and corporates, but that this was not the case at the moment. He said that the unavoidable rise in government debt should also be manageable for the rating which carries a ‘stable’ outlook.
Winslow said that “We now think government debt will increase above 38% of GDP but at a BB level that is still a relative rating strength,” and that “The BB median is 51 per cent - so we think that Turkey still has some fiscal space.”
Winslow does not rule out further capital controls, but thinks that a more likely to see interest rate hikes, even if at the last minute, and that there could be continued interventions in financial markets such as to make it harder for traders to 'short' the lira, administrative measures to dampen imports, higher tariffs or tax measures to support the current account position. He sees an International Monetary Fund programme as highly unlikely though since the Turkish President is strongly against this.
Winslow had previously stated that the steps announced so far by Turkey to avert the virus' economic impact were fairly moderate when compared with countries similarly affected, amounting to around 2% of the country's gross domestic product (GDP). According to the latest figures announced by the Turkish Treasury and Finance Minister Berat Albayrak on May 13th, the support has so far reached TL 240 billion (USD 34.4 billion), which he said was around 5% of the national income. The Turkish Central Bank has increased its bond-buying programme with an additional TL 27 billion of government debt. Turkey also postponed debt payments and reduced the tax burden on various sectors as part of a TL 100 billion package of measures that included doubling the limit of its credit guarantee fund.