Turkey’s long-term foreign currency debt rating was affirmed as “BB-” by Fitch. In a statement released by Fitch on Friday evening, it was stated that the rating reflects “weak monetary policy credibility, high inflation, low external liquidity in the context of high financing needs and geopolitical risks”. While Fitch Turkey increased its 2021 growth forecast from 6.3% to 7.9%; The year-end CPI expectation is 16.9%.
· Long Term Issuer Default Rating affirmed as “BB-”.
· Long Term Local Currency Issuer Default Rating affirmed at “BB-”.
· Long Term Local Currency Debt Rating affirmed at “BB-”.
· The outlook is left as “stable”.
According to Fitch’s report; Policy uncertainty increased in March and remained high after the central bank governor’s abrupt dismissal for the third time since July 2019. This led to a sharp depreciation in TRY, portfolio exits and tighter financing conditions. The Central Bank has kept the policy rate at 19% since March, using the 1-week repo rate as the main policy instrument, and maintained its simple monetary policy ground. In this context, we can say that orthodox monetary policy practices still continue. While credit conditions continue to progress in line with the tight monetary policy; In the fight against inflation, as well as the effect of financial conditions on demand, main fiscal policies hold an important place especially in terms of factors related to supply, climate and tax conditions. Despite that; As inflation rose to 18.95% in July, the Central Bank had no room to lower the policy rate; Despite the tight policy commitment to reduce inflation to 5% in the medium term, there is no clear signal of “additional tightening”.
Fitch expects inflation to decline to 16.9% by the end of 2021 due to the positive base effect and slowing domestic demand. Internal demand components; This is due in part to a significant slowdown in loans due to tighter financial conditions, the phasing out of the 2020 loan incentive and the introduction of macroprudential measures aimed at retail loan growth. Factors that increase inflation risks and limit recovery are; such as the cost impact of the potential for additional depreciation in the local currency, further deterioration in inflation expectations and wage increases (minimum, public, retired) is seen as mechanisms. Fitch forecasts inflation to be 14.6% and 11.8% in 2022 and 2023, respectively.
Due to the rollover effect of the high economic growth performance in the 1Q21 period and the continuation of the improvement in economic activity, Fitch has set its 2021 growth expectation to 7.9% from the 6.3% forecast in June. The slowdown in domestic demand in 2H21 is expected to be offset by strong export growth and the recovery in the tourism sector. In 2022, Fitch expects growth to slow to 3.5%.
For the current account deficit; The current account deficit narrowed as rapid export growth and a decline in gold imports dampened the impact of rising commodity prices, including energy imports. With tourism and export revenues improving year-on-year, the full-year current account deficit is expected to fall from 5.2% in 2020 to 3% of GDP in 2021. Under the basic policy assumption and tourism revenues, the ratio of current account deficit to GDP is estimated to be 2.3% in 2022-2023.
International reserves recovered by; Export rediscounts rebounded after a decline in April-May driven by strong export revenues, including net foreign borrowing and swap growth with China. Reserves will receive further support from the special drawing rights allocation (SDR) equivalent to USD 6.4 billion and the recently announced swap agreement with South Korea. Fitch forecasts reserves to reach USD 109 billion by the end of 2021, but decline to USD 100 billion in 2022-2023 given the ongoing current account deficits and high financial dollarization and limited upside in portfolio inflows. Along with all this; It is also mentioned that Turkey’s reserve buffers are low with the country’s large external financing needs, high deposit dollarization and risk of changing investor sentiment. As stated in the Fitch report; Net reserves (excluding foreign currency receivables, mostly from placements from Turkish banks) rose to $25 billion at the end of July (still well below $41.1 billion at the end of 2019), and net reserves remain negative with swaps with local banks.
Public finance; continues to be the strength of credit profile, thanks to strong revenue performance and prudent spending. A lower level of pandemic-related support is expected in 2021 from the Unemployment Insurance Fund and a broadly balanced local government position is expected; The budget deficit is expected to fall to 3.9% of GDP. Although the central government debt is expected to remain stable in general; Improvement of debt cost and domestic debt composition continues to depend on reducing policy uncertainty and stronger investor confidence.
The banking system is considered to be resilient to financial market stresses. The current foreign currency liquidity of the banking sector is considered sufficient to meet the short-term foreign currency debt. However, the banking sector is considered to have exposures to exchange rate volatility due to the impact on capitalization, asset quality, refinancing risk (given with short-term foreign currency financing) and high deposit dollarization (56% including precious metals).
Although Fitch predicts that geopolitical risks will remain high, it also sees the impact on the economy as limited. The general elections planned to be held in 2023 are expected it to be a determinant on policy orientation and the behavior of economic actors.
Factors that could be subject to a downgrade in rating or outlook:
· Macro: Severe stress on balance of payments and macroeconomic stability risks, sustained erosion of international reserves, or weak investor confidence in companies in the banking sector, for example as a result of premature monetary easing.
· Structural: A serious deterioration in the domestic political or security situation or in international relations that seriously affects the economy and external finances.
· Public finances: A marked deterioration in the government debt/GDP ratio or the broader public balance sheet.
Factors that may be subject to an increase in rating or outlook:
· External Financing: Reduction in external vulnerabilities such as the continued decline in the current account deficit, stronger external liquidity position and declining dollarization.
· Macro: A sustained decline in inflation and increased monetary policy credibility.
· Structural: A reduction in geopolitical risks, for example from the conflict in Syria and US sanctions.
Credit Rating Profile:
· Moody’s long-term foreign currency debt rating: B2, outlook negative
· S&P long-term foreign currency debt rating: B+u, stable outlook
Kaynak Tera Yatırım
Hibya Haber Ajansı
Kaynak: Hibya Haber Ajansı
