Fitch affirms Turkey's credit rating, outlook raised to “stable”

Fitch upgraded Turkey's credit rating to "BB-" and affirmed the rating outlook as "negative" from "stable" raised. Agency, expects Turkey’s inflation to decline to 11% of in 2021 and is expecting GDP growth of 5.7%. While the general expectation in the Foreks survey was that there would be no change in the grade and outlook, the 4 institutions including us, predicted to increase the outlook from negative to stable.

Fitch upgraded Turkey's credit rating to "BB-" and affirmed the rating outlook as "negative" from "stable" raised. Agency, expects Turkey’s inflation to decline to 11% of in 2021 and is expecting GDP growth of 5.7%. While the general expectation in the Foreks survey was that there would be no change in the grade and outlook, the 4 institutions including us, predicted to increase the outlook from negative to stable.

The main factors in increasing the rating outlook of the organization were:

Under Turkey's new economic team returning to a more consistent and orthodox policy mix, helped to alleviate short-term external financing risks arising from the falling international reserves from last year, high current account deficit and deteriorating investor confidence. Monetary policy has been tightened significantly, international reserves stabilized and TRY has appreciated 18% against the USD since the beginning of November. In the new period, it has been observed that the Central Bank has accelerated the tightening cycle with its strong communication strategy and returning to traditional policies. At the same time, previous regulatory measures were largely reversed to curb rapid credit growth. Stating that the Central Bank aims to reach the inflation target of 5%, ensure de-dollarization and rebuild the declining foreign exchange reserves, Fitch predicts that it will take time to rebuild the policy credibility.

Although the position of net international reserves remains weak, it increased from 86.7 billion USD in November to 95.6 billion USD at the beginning of February. While gross reserves are still below USD 105.7 billion at the end of 2019, it is stated that net reserves increased to USD 15.3 billion at the beginning of February, on the other hand, it was well below USD 41.1 billion at the end of 2019. Foreign currency swaps with local banks remain negative for net reserves. Fitch predicts that international reserves will gradually increase to USD 104 billion in 2021 and USD 110 billion in 2022.

Turkey's weak external financing, the past economic fluctuations, high inflation, increasing dollarization and political and geopolitical risks are still negative factors. Public finances remain strong. Assuming moderate deficits in local government, social security and unemployment insurance funds, the budget deficit is expected to be in line with the NEP estimates. Supporting the disinflation process will reduce the budget deficit, and the support provided to mitigate the economic effects of the epidemic will increase budget expenditures.

Fitch predicts that the current account deficit will decline from 5.3% of GDP in 2020 to 2.9% in 2021 and 2.1% in 2022, resulting in slower domestic demand and reduced gold imports. The recovery in foreign demand and the tourism sector will benefit exports of goods and services, albeit at a more gradual rate. Credit growth has slowed markedly since mid-2020, reflecting tightening financial conditions. Decreasing loan growth, including consumer loans, to more sustainable levels is key to lowering inflation and reducing the current account deficit. The agency estimates that Inflation will fall to 11% at the end of 2021 and 9.2% at the end of 2022, compared to the current Central bank forecast of 9.4% and 7% respectively. Drawing attention to the fact that positive growth momentum is maintained despite the tightening of anti-pandemic measures in the economy, 1.4% growth is calculated for the whole of 2020; Growth of 5.7% in 2021 and 4.7% in 2022 was predicted.

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