Fitch downgrades Turkey over doubts after central bank chief’s dismissal

Ratings agency Fitch on Friday downgraded Turkey's sovereign debt by one notch to 'BB-' with a negative outlook, citing heightened doubts after Turkish President Recep Tayyip Erdoğan last week sacked central bank governor. 

Erdoğan on July 6 removed Murat Çetinkaya from his post as the governor of the Central Bank of Turkey and replaced him with the bank’s deputy governor, Murat Uysal.

“The dismissal of the central bank governor Murat Çetinkaya heightens doubts over the authorities' tolerance for a period of sustained below-trend growth and disinflation that Fitch considers consistent with a rebalancing and stabilisation of the economy,” the rating agency said.

Erdoğan’s move also highlights a deterioration in institutional independence and economic policy coherence and credibility, Fitch said. 

In a televised speech at a business meeting in Ankara on Wednesday, Erdoğan said Turkey would now re-shape interest rate policy and the central bank would strongly support the government’s efforts to make the economy grow.

Fitch said the firing of Çetinkaya was also a setback, as the central bank had been rebuilding  credibility by allowing the real rate to increase as inflation had fallen.

Turkey’s inflation rate fell to 15.7 percent in June. It the lowest reading since June last year and below the government’s year end-goal of 15.9 percent. The sharp fall in inflation rate has made a rate reduction by the central bank at a July 25 monetary board meeting more likely, according to analysts.

The bank’s benchmark lending rate was increased by 625 basis points to 24 percent in September to support the lira, which had dropped to a record low due to a political crisis with the United States over the detention of a U.S. pastor and concern about an overheating economy.

Uysal is expected to comply with the Turkish president’s unorthodox views on the relationship between interest rates and inflation. Erdoğan termed him as “a friend in the finance industry” in comments to the Turkish press published earlier on Wednesday.

Fitch now predicts faster cuts in the central bank’s policy rate, to 18 percent at end-2019 compared with 20 percent in its June forecast, and further depreciation.

Turkey is also under the risk of U.S. sanctions likely to be imposed after it received the delivery of the first batch of Russian S-400 missile defence systems on Friday. Fitch said it expected any such sanctions would be of a relatively mild form with minimal direct economic effect, adding that the impact on sentiment could be significant.