Fitch downgrades Turkey’s debt ratings as account deficit widens
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Inflation in Turkey shot to a 24-year high 78.62 per cent in June, mainly due to a currency crisis at the end of last year and the lira’s continued decline.
The economic fallout from Russia’s invasion of Ukraine has also stoked prices in import-dependent Turkey, especially due to rising energy and commodity costs.
In a statement the agency affirmed its ratings outlook at “negative”, adding that it expects Turkey’s consumption to slow given rising inflation, a weaker exchange rate and diminishing domestic confidence.
Fitch forecast annual inflation to average 71.4 per cent this year, the highest among sovereigns rated by the agency, adding that its trajectory remains highly uncertain. Average inflation is set to slow to 57 per cent in 2023, Fitch said, due to overly accommodative policies until parliamentary and presidential elections scheduled for no later than June 2023.
The lira lost 44 per cent of its value against the dollar last year, mainly due to a series of rate cuts from the central bank, sought by President Tayyip Erdogan. The currency is down a further 23 per cent so far this year.
The government has taken steps to stem the lira’s decline. A recent move by the BDDK banking watchdog to restrict lira lending to foreign currency-rich companies helped it rally briefly last week as corporates sold hard currencies.
Referring to the move, Fitch said “policies are becoming increasingly interventionist as well as unpredictable.”
Last year’s rate cuts were part of Erdogan’s new economic programme, which prioritises exports, production and investments, while keeping lending costs low.
The policy rate has stood at 14% since December, leaving real yields in deeply negative territory.
One of the goals was to turn Turkey’s chronic current account deficits to a surplus, but those plans were derailed as energy and commodity prices soared due to the Ukraine conflict, sharply widening Turkey’s trade deficit.
“The government’s focus on maintaining high growth feeds FX demand, depreciation pressures on the lira, decline in international reserves and spiralling inflation, and discourages capital inflows to fund the higher current account deficit,” Fitch said.
It forecast the current account deficit at 5.1 per cent of gross domestic product this year, due to the higher energy prices and weakened external demand, despite a recovery in tourism.
The agency also cited the continued pressure on the central bank’s forex reserves despite measures introduced to replenish them. As of July 1, the central bank’s net forex reserves remained near a 20-year low at $7.51 billion.
Meanwhile Turkey’s annual inflation rate jumped to a 24-year high of 78.62 per cent in June, data showed, just above forecast, driven by the impact of the Ukraine war, soaring commodity prices and a slide in the lira since a December crisis.
Inflation has surged since last autumn, when the lira slumped after the central bank gradually cut its policy rate by 500 basis points to 14 per cent, in an easing cycle sought by President Tayyip Erdogan to boost economic growth.
The latest figures showed consumer prices rose 4.95 per cent in June, compared to a Reuters poll forecast of 5.38 per cent. Annually, consumer price inflation was forecast to be 78.35 per cent.
June consumer price inflation was driven by transportation prices, which surged 123.37 per cent, and food and non-alcoholic drinks prices, which jumped 93.93 per cent, data from the Turkish Statistical Institute (TUIK) showed.
It was the highest annual inflation reading since September 1998, when annual inflation hit 80.4 per cent and Turkey was battling to end a decade of chronically high inflation. The lira was unchanged at 16.78 per cent after the data.
Inflation has been further stoked this year by the economic fallout from Russia’s invasion of Ukraine.
Erdogan said last week he expects inflation to come down to “appropriate” levels by February-March next year. The central bank, which kept the benchmark interest rate steady at 14 per cent despite the rise, said inflation would drop to 42.8 per cent by end-2022.
Witold Bahrke, a senior macro strategist at Nordea Asset Management based in Denmark, said Turkey was “in a league of its own” among emerging markets (EM) when it came to inflation due to what he said was its lack of credible policy response.
“Inflation is a general issue for EM and in Turkey you end up with a toxic mix as we also have a policy issue,” Bahrke said, adding that he expected some further weakening of the lira.
