NEWS ECONOMY NEWS        02/02/2021

Fitch says Turkey’s efforts to improve policy credibility will take time

International credit ratings agency Fitch Ratings, in a report published on its website, acknowledges that “positive steps have been taken to improve policy credibility”, but says that “this process will take time, as will rebuilding Turkey's depleted foreign exchange reserves” in light of Turkey’s weak external finances.

 

Fitch’s report includes the following comments:

 

“Fitch's revision in August 2020 of the Outlook on Turkey's 'BB-' Issuer Default Rating (IDR) to Negative from Stable was driven by greater external financing risks, partly reflecting lower foreign-exchange (FX) reserves and weak monetary policy credibility.

Since then, policy tightening has been stepped up through a more orthodox approach, and a new economic team has placed strong emphasis in communications on sustaining disinflation and repairing external finances. The real average cost of funding from the Central Bank of the Republic of Turkey (CBRT) has risen 7.4pp since June and credit stimulus has been withdrawn. As a result, Turkey has seen a moderate rise in capital inflows and in gross FX reserves since November.

However, this change in policy was precipitated by lira weakness, FX pressure (net reserves excluding FX swaps fell by near USD70 billion in 2020), a higher deposit dollarisation ratio, widening current account deficit (5.2% of projected GDP in 11M20), and high inflation.

CBRT has limited independence and the combination of the government's current targets for GDP growth, inflation and the current account lacks credibility. How policymakers will resolve the trade-offs over time between boosting economic growth and reducing external and domestic imbalances remains unclear. It will take time to rebuild policy credibility, which was already weak ahead of significant loosening and large CBRT FX interventions earlier in 2020.

Similarly, Fitch forecasts a stabilisation in Turkey's external finances but not a sharp near-term improvement in FX reserves.

External financing positions of the private sector have remained resilient, a feature that has provided support to the sovereign rating during periods of stress.”



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