Fitch Turkey Analyst announces year-end dollar forecast

Fitch Ratings Senior Director and Turkey Analyst Erich Arispe Morales evaluated Turkey's economic policies.

Stating that the increase in the borrowing performance of Turkish banks is important in terms of showing that international investors have regained confidence in the sector, Morales described the 'consistent' sustainability of the implemented policies as 'positive' in terms of credit rating.

Speaking to CNBC-e, Morales added regarding the future of the Turkish Lira, "The gradual depreciation of the TL is not an obstacle on the path to disinflation. We expect the TL to close the year at the 36 TL level against the dollar."

Morales said, "The real challenge for policymakers is to maintain a generally tight policy stance for a long period to bring inflation down to levels close to those of countries in a similar category."

Credit ratings are considered to be of critical importance for countries and foreign investors considering investing in these countries. Most large funds perceive portfolio and capital investments in countries with low credit ratings as risky, and investors are only willing to invest in any asset in the country in exchange for a high rate of return that reflects this risk. A low credit rating also brings with it high borrowing costs in global markets. Apart from this, company valuations are also generally directly affected by credit ratings due to the country risk parameters used.

TURKEY'S CREDIT RATING

The credit rating for Turkey, which had reached investment-grade levels in the early 2000s, had regressed to "speculative" levels in recent years with successive negative rating revisions. However, a momentum that started just before the election created an expectation of an upward trend in the country's foreign currency rating. The successive positive rating decisions were also a factor that revealed a positive atmosphere for the future.

International credit rating agency Fitch Ratings, which began evaluating Turkey from the speculative B level in 1994, is evaluating it 30 years later in 2024 at the B+ level, which also indicates another speculative level.

The interview Morales gave to CNBC-e is as follows:

"In the latest report published by Fitch, we saw local currency rating upgrades for Turkish banks. Is it possible to say the same positive outlook for the Turkish economy as a whole?

Since our rating action at the beginning of March, since the government was upgraded to 'B+' with a Positive Outlook, we have observed a significant improvement in international reserves. This improvement is important not only in terms of reserve levels but also in terms of the composition of net reserves (excluding foreign currency swaps) becoming positive. This development was partly achieved by the decrease in financial dollarization.

Despite this, inflation remains the primary policy challenge in the context of still-strong price pressures and resilient domestic demand. While we expect the Central Bank to keep financial conditions relatively tight with the help of targeted bank regulations, we also think that fiscal and income policies, including decisions regarding minimum wage adjustments, will likely be calibrated to cool domestic demand. If this policy consistency can be maintained, it will contribute to lower inflation, a narrowing current account deficit, and a sustainable improvement in international reserves, positively affecting Turkey's creditworthiness.

How do you evaluate the economic management's recent efforts regarding taxation? There is much debate about whether the tax burden will be spread to the base or the top. How do you evaluate these debates in terms of tax justice?

We do not provide advice on the government's policy decisions, including those related to taxes. Our current focus regarding fiscal policy is the extent to which the spending restraint measures and potential revenue measures announced last month will reduce the central government deficit and support the goal of bringing inflation under control by increasing consistency with the Central Bank's tighter policy stance.

From our credit rating perspective, public finance continues to remain strong compared to its peers due to low debt levels (30% of GDP), a strong revenue base, manageable debt amortizations, and improving financing conditions.

WE RAISED OUR INFLATION FORECAST

The Central Bank of the Republic of Turkey's year-end inflation forecast is 38 percent. Do you think this target is achievable with current policies? The Central Bank signaled that it would continue its fight against inflation by keeping interest rates steady at 50 percent at its meeting on June 27. What kind of move do you expect the Central Bank to make regarding interest rates?

In our June update on Turkey's macroeconomic scenario, we raised our 2024 year-end inflation forecast from 40% in March to 43% due to the resilient course of domestic demand and the stronger-than-expected inflation momentum observed especially in April. As emphasized in the June monetary policy decision, we believe the Central Bank is determined to maintain its tight policy stance. Consequently, we expect the CBRT to cut its main policy rate by only 250 basis points at the end of the year. The challenge for policymakers is to maintain a generally tight policy stance for a long period to bring inflation down to levels comparable to similar countries.

Due to more rational policies compared to the past, foreign investors have been entering Turkey for some time through portfolio investments and carry-trade. Do you expect this foreign investment inflow to turn into long-term capital investments (foreign direct investment)?

Following the local elections, it is observed that confidence among investors regarding the sustainability of the current policy direction has increased and expectations regarding exchange rate stability by domestic economic actors have improved, for example, lower financial dollarization is supported.

Since confidence is an important component of the current positive dynamics in the exchange rate and financial markets, we believe that more confidence that the current policy normalization and rebalancing process will lead to a permanent decline in inflation will be important to support lower inflation expectations, which are still significantly above the central bank's intermediate inflation targets, and long-term capital inflows.

What do you think about the stability of the Turkish Lira? In recent days, we are seeing upward movements in the dollar/TL parity again. The parity, which had been moving horizontally at the 32.20 levels for a long time, has seen the 33 levels again.

Do you expect a gradual increase in the dollar/TL until the end of the year? If there is an upward increase in the exchange rate, how do you think its pass-through to inflation will be?

We expect the Turkish Lira to depreciate gradually and likely finish the year around 36 against the US dollar. When supported by the expectation of a tight monetary policy stance, more consistent fiscal and income policies, stronger international reserves in terms of level and composition, access to external financing, and a decreasing current account deficit, we do not expect a sharp depreciation in the TL as in previous years. In our view, as the policy stance anchors expectations and supports the attractiveness of lira assets, the gradual depreciation of the TL should not pose an obstacle to the path of fighting inflation.

TURKEY'S REMOVAL FROM THE GREY LIST

''We did not highlight the removal from the FATF grey list as a rating factor for Turkey's country rating. In our view, Turkey's inclusion in 2021 did not have a measurable negative impact on local banks in terms of access to external financing or correspondent relationships. We believe that the main factors affecting the financing access conditions of Turkish entities, including the state and banks, and the limited capital inflows in 2021-2022, were related to potential macroeconomic and financial stability risks stemming from the previous policy mix that focused on increasing policy uncertainty and low interest rates.

However, we can evaluate the recently announced FATF move in the context of Turkey's broader policy normalization process after the 2023 general elections. We had stated that the increase in the external borrowing of Turkish banks since 2H23 indicates that international investors have regained confidence in the sector since Turkey adopted more traditional macroeconomic policies. Given the still-high funding costs and the banks' generally sufficient capital and FX liquidity buffers, Turkish banks seem likely to continue to enter the market opportunistically.''

News Source: 12punto