Fitch director warns Turkey of perfect storm

ISTANBUL - Anadolu Agency

A slowdown in Turkey’s net capital inflows may temper economic growth, but should not trigger a crisis due to the country’s strong fundamentals, Fitch has said. DAILY NEWS photo, Emrah GÜREL

Turkey now appears to be distant from any balance of payments crisis and the Turkish economy is not in the middle of a perfect storm but has fairly been close, warned Senior Director of Fitch Ratings Paul Rawkins yesterday, during a meeting of the credit agency.

“Turkey’s current account deficit is so high that it cannot be financed by short-term loans. This makes the Turkish economy quite vulnerable to

external shocks,” he said, noting that the country was disproportionally negatively affected by the Fed’s expected gradual decision to taper.

“Any sudden stop in capital inflow to the economy will threaten the growth seriously and in such a scenario Turkey may face a serious recession. The biggest risk for Turkey is the possibility of a sudden stop in line with its high levels of current account deficit,” he said.

“Turkey needs to make some changes in its exchange rate policy to reach its target of a lower current account deficit. We may see some tightening in global liquidity in the near future. This may push Turkey’s central bank to renew its rate strategy. If there will be no intervention then, Turkey may face a ‘harsh landing,’ which the country tried to avoid in 2011,” Rawkins noted.

Nevertheless, Turkey does not face a crisis as opposed to what happened in 2009 and the Eurozone crisis is not as bad as it was in 2011.

“Another significant point for the Turkish economy is that the current account deficit was being financed one way or another,” he noted.

“We believe the country’s strong public finances will help to protect it from a balance of payments crisis.

A slowdown in Turkey’s net capital inflows is likely to temper economic growth, but should not trigger a crisis because of the country’s strong fundamentals,” said the rating agency in a written statement yesterday.

Turkey more resistant to shocks than thought

These make the Turkish economy more resistant to the shocks than the forecasts, according to Rawkins.

Turkey’s public-debt ratio is moderate at 38 percent of GDP, while its budget deficit is low, and it has successfully lengthened its average debt maturity, the statement read.

Additional buffers include a strong banking system, modest household debt, and a dynamic corporate sector accustomed to adjusting to shocks. There are also structural benefits to the Turkish market that we believe will keep investors engaged and reduce the risk of a sharper decline in net capital inflows, according to the agency.

“Why did we upgrade Turkey to investment grade? One of the reasons was Turkey’s soft landing,” Rawkins said, adding that some strong structural fundamentals had played a significant role, including its strong public financing and banking sector.

“Inflation, current account deficit and credit volume are however very high in Turkey, and such factors are definitely very important for the markets. The point is political and social tensions have been unleashed in Turkey since May,” he said.

The rating agency has now been monitoring the country’s political risks closer due to the coming three elections, Rawkins noted.

“If the elections bring about such significant changes that would cause foreign investments in Turkey, then mean something for Turkey’s credit rating. We have been monitoring the political risks more than before,” he said.

Nonetheless, Turkey has a number of positive buffers, Rawkins noted.

“Turkey now appears to be distant from any balance of payments crisis as it has a strong government and its banking and household debts are modest, among others,” he said.