The continuation of rapid credit growth and a sustained downturn in capital inflows would pose a serious risk to Turkey’s sovereign rating, Fitch Ratings agency said Sept. 11, highlighting the risk of “economic populism” ahead of next year’s general elections.
Fitch said positive triggers for Turkey’s outlook would include a “material and durable reduction” in the current account deficit, an improved external financing mix, lower and more stable inflation, a stronger buildup of international reserves and structural reforms that raise domestic savings.
Current account gap narrows
The country’s current account deficit, the Achilles’ heel of the economy, narrowed to $2.6 billion in July, the lowest level in the last 11 months, according to the Central Bank’s data, while the gap stood at $4.1 billion in June, as the seven-month deficit totaled $26.7 billion.
Turkey’s progress toward economic rebalancing may become more challenging for the remainder of 2014, despite the success of policy adjustments made earlier in the year, Fitch Ratings said before the Istanbul meeting.
“Monetary policy settings have loosened since May, while the fragile Eurozone recovery and heightened geopolitical risk could slow the current account adjustment,” the ratings agency said, adding that recent data conveyed mixed messages concerning the rebalancing.
Compared to 2013, the annual credit growth has virtually halved to 20 percent according to the Central Bank. “But the pace of decline has slowed, while further rate cuts could easily reverse the trend,” the agency added.
“Economic populism remains a risk ahead of next year’s parliamentary elections. However, the Cabinet appointments since Recep Tayyip Erdoğan became president suggest he sees the value of having a credible, experienced economic team in place and the first half of this year’s budget outcomes suggest fiscal discipline has been maintained. Political pressure on the Central Bank to cut interest rates shows no sign of easing,” Fitch said.