Turkey risks higher inflation, balance of payments problems -Scope Ratings

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https://www.reuters.com-Reuters

Turkey’s Central Bank headquarters is seen in Ankara, Turkey in this January 24, 2014 file photo. REUTERS/Umit Bektas

Turkey risks structurally higher inflation and balance of payment problems longer-term unless authorities reverse policy missteps, Scope Ratings said on Tuesday.

Policy-related risks remain elevated ahead of Turkey’s scheduledpresidential election in 2023, the ratings agency said.

Structural depreciation of the lira, averaging 17% annual losses against the dollar since 2015, and increased state intervention to slow currency devaluation have reduced confidence in the lira, said Dennis Shen, lead analyst for Turkey at Scope Ratings.

“The proliferation of cryptocurrencies as investors seek protection is a sign of a growing currency crisis. Unless the authorities reverse policy missteps, growing domestic loss of trust in the currency risks structurally higher inflation and balance of payment problems longer-term,” said Shen.

The lira has slid around 16% since mid-March when President Tayyip Erdogan abruptly fired a hawkish and market-friendly central bank chief and replaced him with Sahap Kavcioglu, who had criticised recent rate hikes.

“Erdogan may have some patience with new central bank governor Sahap Kavcioglu and his deputies as they hold rates steady, but more jobs will be a risk at the bank without rate cuts this year,” said Shen.

Pressure for more accommodative monetary policy remained at odds with Turkey’s high inflation, running at an annual 17.1% last month, Scope said.

The economy would be more vulnerable to capital outflows, lira depreciation and higher inflation if there was another further easing of Turkey’s positive real benchmark interest rate of 1.6%, Scope said.

“The central bank is in a bind: it may have a tacit mandate to hold rates unchanged for a period, but likely does not have one to hike rates should this be later required,” said Shen.

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