Turkey’s risks balanced, but policy still in focus: Fitch

LONDON

International ratings agency Fitch has said the risks to Turkey’s sovereign credit profile remain broadly balanced, as reflected in the stable outlook on its “BBB-“ rating which Fitch affirmed last month.

“Turkey’s willingness to make difficult policy decisions, such as the sharp hike in interest rates in January, and the economy’s capacity for adjustment remain important elements of our ratings assessment,” the agency said in a statement released on its website May 1.

The statement cited tighter monetary policy adopted by the Central Bank to save the Turkish Lira from tumbling as the main reason behind its lower growth forecasts of 2.5 percent for 2014, revised down from 3.2 percent, and 3.2 percent for 2015, from 3.8 percent.

The government continues to target growth of 4 percent, although Deputy Prime Minister Ali Babacan said this week that while this was still attainable, domestic demand should be kept under control and the economic priority was to narrow the current account deficit, the statement read.

Fitch also said it predicts the current account deficit will narrow to 6.2 percent of the GDP this year, from 8 percent in 2013.

The institution also drew attention to risks of political instability as one of main concerns regarding the course of the economy.

“The anti-government protests in May 2013 and the political crisis in December/January of this year showed how quickly political instability can impact perceptions of sovereign creditworthiness,” the agency stressed, saying “the capacity for political risk to adversely impact government effectiveness and policy predictability is a rating sensitivity.”

Fitch said “If the government were successful in increasing exports and savings, and achieving a better mix of current account financing, in particular via higher foreign direct investment, it would help address these imbalances.”

The agency also recalled previous attempts to adjust the current account in Turkey, which were “prompted by deep falls in the real, effective exchange rate” and said they have “often proved unsustainable, with the deficit widening again once growth picks up, reflecting a pro-growth policy bias.”

Fitch also noted a slowdown in portfolio entrance into the country since the Fed’s tapering announcement, but said investors did not step on the brakes and “roll-over rates for corporates and banks remain high.”