Fitch downgraded Turkey’s sovereign debt and delivered a scathing verdict on President Recep Tayyip Erdogan’s plan to tackle soaring inflation.
The international rating agency pushed the long-term debt rating deeper into undesirable territory, lowering it from BB- to B+, putting the G20 country on a par with Benin, Egypt, Turkmenistan, Rwanda and Kenya.
Fitch issued a negative outlook for Turkey’s debt, meaning it could face further downgrades, and said the financial system had been made more vulnerable by frequent and intense bouts of financial stress which, according to him, were provoked by political decision-makers.
He said the centerpiece of Erdogan’s plan to stabilize the country’s crisis-prone economy – a series of exchange rate-linked savings plans – would not “sustainably reduce macroeconomic and financial stability risks”. .
The Turkish lira lost more than 40% of its value against the dollar in 2021 after Erdogan ordered the country’s central bank to cut interest rates four times in the last months of the year, despite skyrocketing inflation and a move towards rate hikes by the global powerhouse. banks.
Turkey’s president, who has cemented his grip on the country’s institutions in recent years, rejects economic orthodoxy that raising interest rates helps restore price stability.
He argued that he was presiding over a “new economic model” which he said will address the country’s structural economic imbalances by capitalizing on a weaker and more competitive pound to boost exports, investment and employment.
Turkish officials say a set of state-backed deposit schemes, which seek to entice Turks to save in liras by promising to protect them against exchange rate losses, will reverse a long-term trend of “dollarization and will help bring down inflation to stabilize the local currency. They argue that, in a country heavily dependent on imports, price instability is largely due to the weakness of the lira.
Turkey’s finance minister has predicted that inflation will drop to single digits by May next year. But Fitch said it forecast average inflation of 41% in 2022 and 28% in 2023 – a rate it said was the second highest of any country covered.
The rating agency said the country’s expansionary policy mix – including real interest rates currently hovering around -35% – “could keep inflation high, increase exposure public finances to exchange rate depreciation and inflation”. This could potentially hurt domestic confidence and rekindle pressures on the country’s already weak foreign currency reserves, he said.
Fitch said the ability of new savings schemes to “sustainably improve confidence” was limited. He warned that if the measures fail to curb domestic demand for foreign exchange, the authorities could be forced to resort either to burning more of the country’s central bank reserves or to new capital controls. “This policy response could in turn have a negative effect on domestic confidence,” he said.
Turkey lost its investment grade status from Fitch in January 2017 and has been downgraded three times since then. The latest downgrade will further increase the cost of international borrowing for the country, which relies heavily on foreign financing to fund its economy.