International credit ratings agency Fitch Ratings has declared that its sees as inadequate Turkey’s recent efforts to tighten monetary policy. In an interview with Reuters news agency, Douglas Winslow, the agency’s primary Turkey analyst, noted that the fall in the value of the Turkish lira, Turkey’s dwindling foreign exchange reserves, and the country’s external financing difficulties present risks which require more determined measures to tighten monetary policy.
Winslow told Reuters that further pressure from the currency, double-digit inflation and depleted FX reserves “would significantly increase the chances” of a formal interest rate hike by the yearend. Despite the weakness of the US dollar during the election period in the United States, the Turkish lira has plummeted to its current value of TL 8.52, against the dollar, a fall of around 8% since the beginning of October. The Turkish lira has devalued more than 43% against the US dollar since the beginning of this year. Democratic contender Joe Biden is close to winning the US presidential election. Turkey’s bilateral ties could suffer if Biden is elected and in this case there will be added pressure on the Turkish lira. The Turkish Central Bank raised its interest rate 200 basis points to 10.25% in September and is likely to hike the rate again to head off further depreciation and address inflation.
Winslow has said that the tightening of credit in recent months “has been insufficient to reverse the downward trend in the lira and (to a less extent) in foreign exchange reserves”. He added that the Turkish Central Bank has “limited independence” from political pressure for lower rates and “a track record of being slow to respond to events,” raising the risk that too-loose policy stokes external imbalances and market instability.
Winslow did not however indicate a possible ratings downgrade because the lira has not caused “severe stresses” in the external financing position of banks or corporates, and the trend in foreign exchange FX reserves “has become somewhat less negative”. Turkey’s credit rating is rated as “junk” by the big three sovereign agencies. While Fitch’s rating of BB- is the highest, it revised the outlook to “negative” from “stable” in August citing depleted FX reserves and weak monetary policy credibility.