LONDON (Reuters) - Turkey’s sovereign rating can ride out the current market turbulence if authorities there move to address the economy’s main weaknesses after upcoming presidential and parliamentary elections, Fitch said on Monday.
Fitch has a ‘junk’ BB+ rating on Turkey’s foreign currency debt, but an investment grade BBB- on domestic bonds which is two notches higher than both S&P Global and Moody’s.
Unlike Moody’s, which has just issued a downgrade warning, both Fitch’s ratings also have ‘stable’ outlooks meaning cuts aren’t on the immediate horizon.
There are obvious stresses though. Turkey’s central bank has just hiked interest rates more than 4 percentage points to stem a run on the lira triggered by concerns about political interference in monetary policy, a high current account deficit and even higher inflation.
President Tayyip Erdogan, a self-proclaimed “enemy of interest rates”, has stepped up pressure on the central bank before presidential and parliamentary polls on June 24.
“They have dealt with some of the near-term stresses but we still have the uncertainty about political influence over monetary policy,” Paul Gamble, Fitch’s top ‘emerging’ Europe sovereign analyst told Reuters.
“And more broadly the fact monetary policy has been unable to get inflation to anywhere near the inflation target... That is a long-standing weakness.”
Turkey is the only BB bracket country rated by Fitch where inflation is currently in double-digits. On the flip side it has much lower debt than most, either as a percentage of GDP or as a share of annual government revenue.
“The rate hikes were in line with our scenario,” Gamble said, adding that a tandem move to also bring 4 different Turkish interest rates closer together had been “useful” as well.
It is too early to declare worries about the central bank’s reaction function in the face of regular political pressure over, however.
“They still have the capacity to move the average funding rate significantly from the policy rate, so let’s see how that evolves.”
Fitch’s main triggers for a rating move remain heightened external stresses from global interest rates or currency markets, a hit to public finances or a serious deterioration in the country’s political or security situation.
The country’s elections bring additional uncertainty. Erdogan wants to bolster his own power but his AKP party is now facing more competition for control of the Parliament.
“After these elections we don’t foresee any political events (to distract the government) so let’s look at what policies are implemented,” Gamble said.
Turkey is running a large current account deficit and has a very large external financing requirement, meaning the pressure will be on whatever the outcome.
“These are things that can’t be addressed very quickly, but as we have seen the external environment can move pretty quickly, so we need to see how authorities respond,” Gamble said. “We will look more at what they do than what they say.”
Reporting by Marc Jones; Editing by Toby Chopra