Fitch issues reserve warning to Turkey

International credit rating agency Fitch Ratings Senior Director Erich Arispe Morales made assessments regarding Fitch's confirmation of Turkey's credit rating at “B” and its decision to upgrade the outlook from “negative” to “stable” after 2 years.

Emphasizing that the change in Turkey's monetary policy has helped reduce uncertainties, Morales stated, “We have seen that the policy is more consistent than before. This improved policy has reduced the pressure on reserves. I can also state that we have seen some reduction in uncertainty after the elections with the clear indication of the policy direction.”

Noting that Turkey recorded economic growth above expectations in the second quarter of this year, Morales said, “We think that economic growth will be around 4.3 percent this year. Next year, if policy consistency, a tight fiscal credit environment, and high interest rates remain on the table, we think the economy could grow by around 3 percent. In 2025, economic growth will increase again to reach 3.4 percent.”

EMPHASIS ON INFLATION AND CURRENT ACCOUNT DEFICIT

When asked about what steps Turkey needs to take for potential rating upgrades and to reach an “investment grade” rating again, Erich Arispe Morales noted the following:

“We stated that credit pressures have eased due to the policy change, but we know that macroeconomic and external financial challenges remain significant. There is an inflation rate of 59 percent in August.

We observe that the current account deficit remains high. We will look at international reserves; we certainly note that there is an improvement in this area as a result of the exchange rate being able to move more freely.”

Stating that Turkey is in a sensitive position due to its high financing needs and foreign exchange reserve levels, Morales said, “In this context, moving forward, we think we need to be more confident that this policy direction will be maintained and will provide some reduction in macroeconomic stability risk. Reducing inflation can be given as an example of this.”

LOCAL ELECTION UNCERTAINTY IN MAINTAINING POLICY

Morales reported that the credit rating agency will monitor to what extent macroeconomic stability risks can be reduced and to what extent the monetary policy direction can be maintained as the country heads toward local elections.

Fitch Ratings Senior Director Morales recalled that Turkey was at the same rating level in 2003 as it is currently being evaluated, and was upgraded to “investment grade” in 2012, and made the following assessments:

“For emerging countries, this (upgrading the rating to investment grade) requires a long-term effort. It is also about recalibrating and improving these policies over a longer period. This not only gives us confidence but also increases economic resilience and predictability for policymakers.”

Expressing that the financing relationships established with Gulf countries and the World Bank's decision to increase its investments in Turkey are extremely positive, Morales said, “These are important announcements… We believe that access to financing is certainly very important for Turkey.”

In his assessment, Morales stated, “Regarding policy adjustment, despite the track record of reversals, key policymakers have taken the first steps in a direction that ensures stability and addresses macroeconomic imbalances by taking office at the Ministry of Treasury and Finance and the Central Bank.”

News Source: 12punto