Fitch downgrades Turkey’s debt rating from ‘B’ to ‘B’

Residential housing stretches to the skyline of Istanbul in Turkey June 13, 2018. REUTERS/Russell Boyce

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July 8 (Reuters) – Rating agency Fitch on Friday downgraded Turkey’s debt rating from ‘B’ to ‘B+’, citing rising inflation and general concerns about the economy, ranging from widening current account deficit to interventionist policies.

Inflation in Turkey hit a 24-year high of 78.62% in June, mainly due to a currency crisis late last year and the continued decline of the lira read more.

The economic fallout from Russia’s invasion of Ukraine has also fueled prices in Turkey, which is dependent on imports, particularly due to rising energy and raw material costs.

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In a statement, the agency said its rating outlook was “negative”, adding that it expects Turkish consumption to slow given rising inflation, a weaker exchange rate low and a decline in domestic confidence.

Fitch forecasts average annual inflation of 71.4% this year, the highest among sovereigns rated by the agency, adding that its trajectory remains highly uncertain. Average inflation is expected to slow to 57% in 2023, Fitch said, due to overly accommodative policies until legislative and presidential elections scheduled no later than June 2023.

The lira lost 44% of its value against the dollar last year, mainly due to a series of central bank rate cuts, demanded by President Tayyip Erdogan. The currency is down another 23% so far this year.

The government has taken measures to stem the decline of the lira. A recent move by banking watchdog BDDK to restrict lira lending to foreign-currency-rich companies helped it rally briefly last week as companies sold off hard currency.

Referring to the decision, Fitch said “politics are becoming more interventionist and unpredictable”.

Last year’s rate cuts were part of Erdogan’s new economic program, which prioritizes exports, production and investment, while keeping loan costs low.

The policy rate has held steady at 14% since December, leaving real yields in deep negative territory.

One of the goals was to turn Turkey’s chronic current account deficits into a surplus, but those plans were derailed when energy and commodity prices soared due to the conflict in Ukraine, deepening the Turkey’s trade deficit.

“The government’s focus on maintaining high growth is fueling demand for foreign currency, depreciating pressures on the pound, falling international reserves and soaring inflation, and discouraging inflows. capital to fund the higher current account deficit,” Fitch said.

It projects a current account deficit of 5.1% of gross domestic product this year, due to rising energy prices and weakening external demand, despite a recovery in tourism.

The agency also cited continued pressure on central bank foreign exchange reserves despite measures introduced to rebuild them. As of July 1, the central bank’s net foreign exchange reserves remained near their lowest level in 20 years at $7.51 billion.

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Reporting by Vansh Agarwal in Bengaluru and Ali Kucukgocmen in Istanbul; Editing by Shailesh Kuber and William Mallard

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