Jul 13 2018

Fitch Downgrades Turkey to 'BB'; Outlook Negative

Fitch Ratings has downgraded Turkey's Long-Term Foreign-Currency Issuer Default Rating (IDR) to 'BB' from 'BB+'. The Outlook is Negative. 

The rating agency said it "believes downside risks to macroeconomic stability have intensified owing to the widening in the current account deficit (CAD), more challenging global external financing environment, jump in inflation and the impact of the plunge in the exchange rate on the private sector, which has significant foreign currency-denominated debt."

Turkey recently stated that it is likely to establish own credit ratings agency. A national credit ratings agency will be set up during 2018 and will help Turkish banks better assess the risk of loans in Turkish lira, which are over-estimated by current methods, said Mehmet Ali Akben, head of the country’s banking regulator, the BDDK.

In Fitch's opinion, "economic policy credibility has deteriorated in recent months and initial policy actions following elections in June have heightened uncertainty. This environment will make it challenging to engineer a soft landing for the economy."

President Recep Tayyip Erdogan appointed his son-in-law Berat Albayrak as Turkey's new minister in charge of economy. Since Erdogan announced his new presidential cabinet on Monday, Turkish lira lost nearly 10% of its value. Before the announcement 1 dollar was about 4.50 lira. On Friday night, just before the midnight, it stood at 4.87.

Here are some other highlights from Fitch's report:

Turkey's large gross external financing requirement leaves it vulnerable to shocks.

... Monetary policy credibility has been damaged by comments by President Erdogan suggesting a greater role of the presidency in setting monetary policy after the elections. Subsequent amendments to the central bank's articles of association appear to strengthen the president's influence, notably over key appointments. Monetary policy has persistently been unable to bring inflation near its 5% target and inflation expectations have become unanchored. 

Key figures from the previous administration with reformist credentials were excluded from a new cabinet, appointed on 9 July, while the son-in-law of the president was appointed as Minister of Treasury and Finance. 

Currency weakness poses a test to the private sector, given its open net FX position of USD221 billion at end-April, while tighter financial conditions test its large external financing requirement. The private sector has regularly demonstrated capacity to cope with adverse financing and exchange rate shocks, but a series of recent corporate debt restructurings point to the crystallisation of risks stemming from high corporate borrowing in recent years. 

Political and geopolitical risks weigh on Turkey's ratings and World Bank governance indicators have fallen below the 'BB' median. Tolerance of dissenting political views is reducing in the opinion of independent observers. The state of emergency is expected to be lifted in July, but the President has significant capacity to rule by decrees under the new constitution and a purge of followers of the group that the government considers responsible for the coup attempt in July 2016 continues.