Lira depreciates sharply after Fitch’s downgrade

ISTANBUL- Hürriyet Daily News

The Turkish Lira weakened 1 percent to 1.8706 per dollar yesterday after a Fitch downgrade on the country’s outlook and a Central Bank meeting as the Istanbul Stock Exchange (İMKB) fell 1.9 percent.

Fitch Ratings changed its outlook on its long- term foreign currency rating to “stable” from “positive,” underlining that the short-term risks to economic stability have increased.

The agency kept Turkey’s rating at BB+, one notch below investment grade.

The downgrade “reflects an increase in near-term risks to macroeconomic stability as Turkey faces the challenge of reducing its large current-account deficit and above-target inflation rate,” Fitch analyst Ed Parker said in an emailed statement yesterday.

Turkey’s Central Bank, meanwhile, kept the benchmark interest rate at a historic low yesterday after almost doubling the cost of borrowing for banks last month to support the lira and combat accelerating inflation.

The Central Bank held the benchmark one-week repo rate at 5.75 percent, it said on its website yesterday.

“There’s not much left to decide at the monetary policy committee since the bank started to manipulate interest rates on a daily basis,” Nilüfer Sezgin, an economist at Ekspres Invest in Istanbul, said in an emailed report. The bank will want to maintain “flexibility, given the mounting uncertainties about the European sovereign debt crisis,” Bloomberg News quoted Sezgin as saying.

The lira depreciated for an eighth day in a row, hitting 1.87 per dollar yesterday as yields on benchmark two-year bonds rose 17 basis points to 10.68 percent.

The İMKB’s main national 100 index also lost 1.9 percent to 50,981.04.

The dynamics of the Turkish public debt are positive, the growth potential is sound and the banking sector is strong, the statement said, adding that weaker macro financial risks and a “soft landing” in the economy may affect its rate for Turkey positively. Still, financial instability and slowdown in disinflation were the negative factors.

Fitch’s Turkish growth projection for 2011 and 2012 is 7.5 percent and 2.2 percent respectively.

Fitch’s change in outlook is “a shallow decision,” according to the Banks Association of Turkey (BBDK). “We have previously criticized the decisions of the international rating agencies and we will continue do so,” Hüseyin Aydın, the president of BBDK, told journalists after an Istanbul meeting yesterday.

Turkey’s stated aim of zero real interest rates is an “ideal” scenario and the Central Bank proved last month that it is ready to raise borrowing costs when needed, Deputy Prime Minister Ali Babacan said.

While the government has a “keen intention” of reducing historically high rates to more “reasonable” levels, it will not sacrifice inflation or financial stability, Babacan said in London yesterday. Prime Minister Recep Tayyip Erdogan’s goal of zero real rates is a long-term target, he said.

“We don’t want high interest rates and we don’t want high inflation either,” Babacan said. The Central Bank has a “long- term approach and will take short-term clever steps to achieve its goals” of price and financial stability in a volatile global environment.

The Turkish current account deficit, at about 10 percent of gross domestic product, is the weakest side of the economy, many analysts have said.

The current account gap is the main source of worry for an economy that has strong banks and a sound fiscal position, Babacan said. The gap will narrow only “gradually” in the months ahead because of Turkey’s dependence on imports such as oil and gas, and its vulnerability to a slowdown in Europe, which takes almost half of its exports, he said