Fitch upgrade to Turkey outlook reflects cautious optimism over rating

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Fitch upgraded its outlook for Turkish debt to ‘stable’ from ‘negative’ late last week, but kept its junk ‘BB-‘ credit rating intact in a move that reflected both optimism and caution about the country’s economic prospects.

While Fitch praised a return to monetary orthodoxy under central bank governor Naci Ağbal, appointed by President Recep Tayyip Erdoğan in early November, it said concerns about the independence of monetary policymaking persisted.

Fitch is the first international credit ratings agency to upgrade Turkey’s debt outlook after hikes to central bank interest rates and a strengthening lira bolstered investor confidence in the country following a slump in the currency last year. The lira has gained about 20 percent against the dollar since Ağbal’s appointment.

“Turkey’s return to a more consistent and orthodox policy mix under a new economic team has helped ease near-term external financing risks derived from last year’s falling international reserves, a high current account deficit and deteriorating investor confidence,” Fitch said in a report late on Friday.

“Fitch considers that rebuilding policy credibility will take time, given limited central bank independence, exemplified by the sacking of two of its governors since July 2019, and a recent track record of delayed response to mounting macroeconomic pressures or premature policy easing.”

Fitch said that Turkey’s international reserves position, depleted by currency interventions last year, remained weak despite a recent increase in the central bank’s holdings. Net reserves rose to $15.3 billion in early February but were still considerably below the $41.1 billion accumulated as of end-2019. Reserves, net of foreign currency swaps, are negative, it said.

Political risk for the country remains elevated due to the threat of economic sanctions from the United States in response to Turkey’s purchase of S-400 air defence missiles from Russia in 2019, Fitch said. Differences with Washington over the latter’s support for Kurdish militants in Syria will also weigh, it said.

“While we expect sanctions to remain narrow in scope and not significantly impact the Turkish economy, this issue will likely remain a source of tension in addition to U.S. cooperation with the Kurdish People’s Protection Units (YPG),” Fitch said.

Inflation is expected to remain in double digits this year and the central bank’s goal of 9.4 percent for end-2021 is likely to remain elusive, it said. Consumer price inflation in Turkey edged up to 15 percent in January from 14.6 percent in December.

“We forecast that inflation will decline to 11 percent at end-2021 and 9.2 percent at end-2022, compared with the current central bank forecast of 9.4 percent and 7 percent, respectively,” Fitch said.

Ahval

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