Econostrum | Economic News in the Mediterranean

Fitch downgrades Turkish debt to B with negative outlook

Written by Frédéric Dubessy on Monday, July 11th 2022 à 15:14 | Read 204 times

Fitch remains sceptical about Turkey's economy (photo: F.Dubessy)
Fitch remains sceptical about Turkey's economy (photo: F.Dubessy)
TURKEY. Fitch Ratings decided on Friday 8 July 2022 to downgrade Turkey's long-term foreign currency sovereign debt (IDR) rating from B+ to B. The British agency, a wholly-owned subsidiary of the American Hearst Corporation, justifies this downgrade by "rising inflation and general concerns about the economy, the growing current account deficit due to increasingly interventionist and unpredictable policies". It adds a negative outlook.

Inflation in the country continues to hit record highs and, due to the conflict in Ukraine, commodity and energy prices are rising. It stood at 78.62% in June 2022, its highest level for 24 years. The currency crisis is in full swing with the pound in continuous decline losing 44% of its value against the dollar in 2021 and a further 23% since the beginning of 2022.  

As of 1 July 2022, the central bank's net foreign exchange reserves remained close to their lowest level in twenty years at $7.51bn. "We estimate that the central bank's net foreign exchange asset position turned slightly negative in June and fell to minus $64bn excluding currency swaps, similar to the level in December 2021. We expect international reserves to fall to $94bn by the end of 2022 and to $88bn in 2023, bringing the current account reserve coverage to 2.7 months, below the median 'B' forecast of 3.8 months," the UK analysts commented.

Average inflation of 71.4% in 2022

"The government's focus on maintaining high growth is fuelling demand for foreign exchange, depreciation pressures on the pound, falling international reserves and spiralling inflation, and discouraging capital inflows to finance the rising current account deficit," the agency said. The latter is expected to reach 5.1% of gross domestic product (GDP) in 2022.

According to Fitch, "external debt maturing over the next twelve months (end April) amounts to $182bn. Access to external financing for the government and private sector has shown resilience, but remains vulnerable to changes in investor sentiment, particularly given the tightening of global financing conditions and Turkey's rising financing costs. Turkey's issuance of a total of $5bn in early 2022 and foreign currency liquidity reserves reduce short-term funding risks for the government."

The agency expects consumption to slow due to rising inflation, a weak exchange rate and declining domestic confidence. It expects average annual inflation to reach 71.4% in 2022, the highest among the sovereign countries it rates. However, it is expected to slow to 57% in 2023 as a result of opportunistic policies in view of the next parliamentary and presidential elections (head of state Recep Tayyip Erdogan is again a candidate) scheduled for June 2023 at the latest.

Already a drop in February 2022

"We believe that the overall policy mix will remain excessively accommodative at least until the 2023 elections," Fitch said. The rating agency is concerned that "selective macroprudential policies aimed at reducing the pace of rapid credit growth and tighter capital flow management measures will not reduce risks to macroeconomic and financial stability (...) There is a risk that if depositor confidence is lost or banks' and corporates' hitherto resilient access to external financing deteriorates, official international reserves will come under pressure, given that a significant proportion of banks' foreign currency assets are held by the central bank."

In February 2022, Fitch had already downgraded the rating from BB- (obtained in February 2021) to B+ with a negative outlook citing "vulnerabilities in terms of high inflation, low external liquidity and low policy credibility". The agency expected a further downgrade within 12 months. So it only took five to downgrade to B.

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