Fitch downgrades Turkey’s debt as account deficit widens

Rating agency Fitch lowered Turkey’s debt rating from “B” to “B+”, citing rising inflation and general concerns about the economy, ranging from a growing current account deficit to interventionist policies.

Inflation in Turkey hit a 24-year high of 78.62% in June, mainly due to a currency crisis late last year and the continued decline of the lira.

The economic fallout from Russia’s invasion of Ukraine has also fueled prices in Turkey, which is dependent on imports, particularly due to rising energy and raw material costs.

In a statement, the agency said its rating outlook was “negative”, adding that it expects Turkish consumption to slow given rising inflation, a weaker exchange rate low and a decline in domestic confidence.

Fitch predicts average annual inflation of 71.4% this year, the highest among sovereigns rated by the agency, adding that its trajectory remains highly uncertain. Average inflation is expected to slow to 57% in 2023, Fitch said, due to overly accommodative policies until legislative and presidential elections scheduled no later than June 2023.

The lira lost 44% of its value against the dollar last year, mainly due to a series of central bank rate cuts, demanded by President Tayyip Erdogan. The currency is down another 23% so far this year.

The government has taken measures to stem the decline of the lira. A recent move by banking watchdog BDDK to restrict lira lending to foreign-currency-rich companies helped it rally briefly last week as companies sold off hard currency.

Referring to the decision, Fitch said “politics are becoming more interventionist and unpredictable”.

Last year’s rate cuts were part of Erdogan’s new economic program, which prioritizes exports, production and investment, while keeping loan costs low.

The policy rate has held steady at 14% since December, leaving real yields in deep negative territory.

One of the goals was to turn Turkey’s chronic current account deficits into a surplus, but those plans were derailed when energy and commodity prices soared due to the conflict in Ukraine, deepening the Turkey’s trade deficit.

“The government’s focus on maintaining high growth is fueling demand for foreign exchange, depreciating pressures on the lira, falling international reserves and soaring inflation, and discouraging inflows. capital to fund the higher current account deficit,” Fitch said.

It projects a current account deficit of 5.1% of gross domestic product this year, due to rising energy prices and weakening external demand, despite a recovery in tourism.

The agency also cited continued pressure on the central bank’s foreign exchange reserves despite measures introduced to rebuild them. As of July 1, the central bank’s net foreign exchange reserves remained near their lowest level in 20 years at $7.51 billion.

Meanwhile, Turkey’s annual inflation rate hit a 24-year high of 78.62% in June, data showed, just above forecasts, as war in Ukraine hit, of soaring commodity prices and a fall in the lira since a crisis in December.

Inflation has been rising since last autumn, when the pound slumped after the central bank gradually cut its benchmark rate by 500 basis points to 14%, in an easing cycle sought by President Tayyip Erdogan to stimulate economic growth.

The latest figures show consumer prices rose 4.95% in June, against a Reuters poll forecast of 5.38%. Annual consumer price inflation was estimated at 78.35%.

Consumer price inflation in June was driven by transport prices, which jumped 123.37%, and food and non-alcoholic beverage prices, which jumped 93.93%, according to the data from the Turkish Statistical Institute (TUIK).

It was the highest annual inflation reading since September 1998, when annual inflation hit 80.4% and Turkey struggled to end a decade of chronically high inflation. The lira remained unchanged at 16.78% after the data.

Inflation has been fueled again this year by the economic fallout from the Russian invasion of Ukraine.

Erdogan said last week that he expects inflation to come down to “appropriate” levels by February-March next year. The central bank, which kept the benchmark interest rate at 14% despite the hike, said inflation would fall to 42.8% by the end of 2022.

Witold Bahrke, senior macro strategist at Denmark-based Nordea Asset Management, said Turkey was “in a league of its own” among emerging markets (EM) when it comes to inflation due to what he called lack of a credible political response.

“Inflation is a general problem for emerging markets and in Turkey you end up with a toxic mix because we also have a political problem,” Bahrke said, adding that he expected further weakening of the lira. .