Fitch raised its growth expectation for Turkey this year from 6.3 percent to 7.9 percent
Fitch Ratings raised its growth expectation for Turkey this year from 6.3 percent to 7.9 percent due to the high base effect and the ongoing recovery in economic activities.
Dilara Zengin|14.08.2021
Washington
International credit rating agency
Fitch Ratings maintained Turkey's credit rating as "BB-" and its outlook as "stable".
In the statement made by Fitch, it was noted that Turkey's credit rating and outlook were confirmed. In the statement, it was stated that Turkey's long-term foreign currency issuer default rating was confirmed as "BB-" and the outlook as "stable". In the statement, which stated that policy uncertainty remains high in Turkey, it was noted that inflation is expected to decline to 16.9 percent at the end of 2021 due to the positive base effect and slowing domestic demand.
In the statement, it was stated that the average annual inflation is expected to be 14.6 percent for next year and 11.8 percent for 2023.
In Fitch's statement, it was reported that this year's growth expectation for Turkey was increased from 6.3 percent to 7.9 percent due to the strong performance especially in the first quarter of the year, due to the high turnover effect and the ongoing resistance in economic activity.
Pointing out that the slowdown in domestic demand in the second half of this year will be balanced by the strong export and the recovery in the tourism sector, it was stated that the country's economy is expected to grow by 3.5 percent in 2022.
In the statement, it was stated that the current account deficit narrowed and it was recorded that the current account deficit will decrease to 3 percent of the gross domestic product (GDP) in 2021 with the improvement in tourism revenues in the second half of this year.
AA obviously Cut the FITCH Rating short but the Report is very Detailed.
Turkey's ratings reflect weak monetary policy credibility, high inflation, low external liquidity in the context of high financing requirements and geopolitical risks. These credit weaknesses are set against low government deficits and debt and stronger growth performance and structural indicators, such as GDP per capita and Human Development, relative to rating peers.
The Stable Outlook balances elevated policy uncertainty due to rising inflation, lack of central bank independence and the potential for de-stabilising stimulus ahead general elections due by 2023 against an easing of near-term external financing pressures due to a narrowing current account deficit, moderately higher international reserves, and banks and corporates' uninterrupted access to sufficient external finance to roll-over large debt payments.
Policy uncertainty increased in March and remains high after the abrupt dismissal of the central bank governor, the third since July 2019, leading to sharp lira depreciation, portfolio outflows and tighter financing conditions. The central bank's new management has kept its policy rate steady at 19% since March and maintained its predecessor's commitment to a flexible exchange rate and the use of the one-week repo rate as its main policy instrument, preserving improvements in terms of transparency. Credit and fiscal policies also remain aligned with the objective to reduce inflation.
In Fitch's view, political considerations limit the ability of the central bank to raise its policy rate despite rising inflation (18.95% yoy in July). Weak monetary policy credibility is reflected in a record of delayed response to mounting macroeconomic pressures or premature policy easing, and inflation remaining significantly above the 5% official target over an extended period.
Fitch Ratings - London - 13 Aug 2021: Fitch Ratings has affirmed Turkey's Long-Term Foreign-Currency Issuer Default Rating (IDR) at 'BB-' with a Stable Outlook.
A full list of rating actions is at the end of this rating action commentary.
KEY RATING DRIVERS
Turkey's ratings reflect weak monetary policy credibility, high inflation, low external liquidity in the context of high financing requirements and geopolitical risks. These credit weaknesses are set against low government deficits and debt and stronger growth performance and structural indicators, such as GDP per capita and Human Development, relative to rating peers.
The Stable Outlook balances elevated policy uncertainty due to rising inflation, lack of central bank independence and the potential for de-stabilising stimulus ahead general elections due by 2023 against an easing of near-term external financing pressures due to a narrowing current account deficit, moderately higher international reserves, and banks and corporates' uninterrupted access to sufficient external finance to roll-over large debt payments.
Policy uncertainty increased in March and remains high after the abrupt dismissal of the central bank governor, the third since July 2019, leading to sharp lira depreciation, portfolio outflows and tighter financing conditions. The central bank's new management has kept its policy rate steady at 19% since March and maintained its predecessor's commitment to a flexible exchange rate and the use of the one-week repo rate as its main policy instrument, preserving improvements in terms of transparency. Credit and fiscal policies also remain aligned with the objective to reduce inflation.
In Fitch's view, political considerations limit the ability of the central bank to raise its policy rate despite rising inflation (18.95% yoy in July). Weak monetary policy credibility is reflected in a record of delayed response to mounting macroeconomic pressures or premature policy easing, and inflation remaining significantly above the 5% official target over an extended period.
We expect inflation to ease to a still high 16.9% by end-2021, due to a favourable base effect and slowing domestic demand. The latter will be partly due to a marked slowdown in credit growth due to tighter financial conditions, the phasing out of 2020 credit stimulus and the introduction of macroprudential measures targeting retail loan growth. The potential for additional depreciation pressures, further deterioration in inflation expectations and indexation mechanisms such as wage agreements increase inflationary risks. We forecast inflation to average 14.6% and 11.8% in 2022-2023, remaining multiples above the forecast 3.4% 'BB' median.
We have revised up our growth forecast up to 7.9% in 2021, from 6.3% in June, due to high carryover effect (especially after a strong performance in 1Q21) and continued resilience in economic activity. Slowing of domestic demand in 2H21 will be cushioned by strong export growth and a recovery in the tourism sector. We forecast growth to slow to 3.5% in 2022, based on our expectation that Turkey's policy mix, especially monetary policy, avoids exacerbating macroeconomic imbalances.
The current account deficit has narrowed, as rapid export growth and a decline in gold imports have mitigated the impact of rising commodity prices, including energy imports. The full year current account deficit will decline to 3% of GDP in 2021, from 5.2% in 2020, as tourism export receipts improve yoy in 2H21. Under our baseline policy assumption and recovering tourism revenues, we expect the current account deficit to average 2.3% in 2022-2023, similar to the forecast 'BB' median.
International reserves have recovered due to strong export revenues, including export rediscounts, net external borrowing and the increase of the FX swap with China, after a decline in April-May. Reserves will receive a further boost from the special drawing rights allocation equivalent to USD6.4 billion and the recently announced FX swap with South Korea. We forecast reserves to reach USD109 billion at end-2021, but decline in 2022-2023 to USD100 billion given continued current account deficits and high financial dollarisation, and the limited upside for portfolio inflows, in our view.
General government debt will remain broadly stable at 39.7% of GDP in 2021, significantly below the forecast 59% 'BB' median. Currency risk has increased (57% of central government debt was foreign currency linked or denominated at May-2021, up from 39% in 2017). The objective of improving domestic debt composition in terms of costs, duration and currency remains dependent on reduced policy uncertainty and stronger investor confidence.
Nevertheless, the banking sector remains vulnerable to exchange-rate volatility due to the impact on capitalisation, asset quality, refinancing risk (given short-term foreign-currency financing) and high deposit dollarisation (56% including precious metals). The banking sector has increased its exposure to the sovereign both through government debt holdings (70% of domestic debt in May) and FX swaps with the central bank.
Geopolitical risks will remain elevated, but existing sanctions have so far had a limited impact on the economy. In addition to the S-400 issue and US cooperation with Kurdish forces in Syria, the relationship with the US has several potential flash points. Recent developments related to Cyprus could reignite tensions with the EU, and operations in northern Syria, Libya, and support for Azerbaijan in the conflict with Armenia could represent additional sources of tension with Russia.
General elections are scheduled for 2023 and the political calendar will have an impact on policy direction and expectations of economic actors, in Fitch's view. Given the weakened credibility and policy buffers, the potential size of economic stimulus may have to balance the expected economic and political benefits against the risk of reigniting macroeconomic instability, which seems to have hurt the government's support in 2020. Ongoing judicial proceedings against opposition parties and possible presidential candidates, potentially preventing them from participating in the election, could increase political uncertainty.
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