NEWS ECONOMY NEWS        10/11/2020

Fitch sees positive impact of change in Turkey’s top finance jobs

International credit ratings agency Fitch Ratings sees the replacement of the Turkish Central Bank governor as bringing the possibility of an improvement in monetary policy credibility, and the decision of next week's monetary policy committee regarding the policy interest rate as an initial indication of this improvement. Fitch's view on the implication of the Turkish government's change of the top finance positions is given as follows on its website :


"Naci Agbal was appointed as governor of the Central Bank of the Republic of Turkey (CBRT) on 7 November, succeeding Murat Uysal, who took over as governor in July 2019 after his predecessor was sacked. The move comes alongside Berat Albayrak's resignation as Finance Minister and replacement by former Deputy Prime Minister Lutfi Elvan, although any link between the changes is unclear, as is whether the change will accelerate economic reform, although investor confidence is more sensitive to monetary policy settings in our view.


A former Finance Minister himself, Mr Agbal said in a short statement that "monetary policy communication will be strengthened in the framework of transparency, accountability and predictability principles", suggesting that his appointment could lead to a somewhat more orthodox monetary policy stance. Nevertheless, a second change in the CBRT leadership in less than two years highlights its limited independence from political pressure (both changes were effected by Presidential decree). The motivation for Mr Uysal's sacking remains unclear and President Erdoğan has continued to voice his opposition to higher interest rates. The CBRT's decision to leave the one-week repo rate unchanged at its October meeting contributed to the Turkish lira's subsequent fall to new record lows against the dollar.


Our revision in August of the Outlook on Turkey's 'BB-' rating to Negative was mainly due to an increase in external financing risks from the fall in foreign-currency reserves, weak monetary policy credibility, negative real interest rates and a sizeable current account deficit, partly fuelled by a strong credit stimulus. Since then, the CBRT's policy reaction function has been largely in line with our expectation that it would focus on tightening policy through the interest rate corridor and the credit channel, although the one-week repo rate was increased by 200bp to 10.25% in September.


The weighted average cost of CBRT funding has increased to 14.2% from a low of 7.3% in mid-July and credit growth - on a 13-week annualised basis - has cooled to 11% from a high of 45% in early July, mainly due to weaker state bank lending and a sharp drop-off in the use of the government's credit guarantee scheme. But this has not reversed the downward trend in the lira and to a lesser extent in foreign exchange reserves, and 12-month inflation expectations have edged up.


We expect tightening via the main policy rate would have a greater impact given that it is more transparent and predictable and demonstrates greater independence from political pressure. The CBRT's slow response to the lira's weakness increases the risk that policy is tightened insufficiently, contributing to further external imbalances, market instability, and a more disorderly external adjustment. This risk was a key factor in our August Outlook revision. The 19 November monetary policy committee decision will be a key indicator of whether this process can be reversed.


Greater lira volatility has also led to an increase in the share of bank deposits held in foreign currency (to 56% from 50% in July) and in holdings of gold, contributing to the wider current account deficit and balance of payments pressures. However, these developments have not spilled over into severe stresses in the external financing position of banks or corporates and the underlying trend in foreign-currency reserves has become less negative (partly due to less foreign-currency interventions by the CBRT). These are among the main potential triggers for a sovereign rating downgrade that we set out in August."




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