Fitch revises Turkiye's LTFC IDR outlook to stable; affirms at 'B'

The revision of the outlook has to do with several rating drivers.

It reflects the return to a more conventional and consistent policy mix that reduces near-term macro-financial stability risks and eases balance of payments pressures. There is still uncertainty regarding the magnitude, longevity and success of the policy adjustment to bring down inflation, partly due to political considerations, Fitch Ratings said in a release.

The country’s 'B' ratings reflects a record of political interference, high inflation, weak external buffers relative to high external financing needs and financial dollarisation. These weaknesses are balanced against the sovereign's low general government debt relative to peers, a record of external market access and manageable debt repayment profile.

Although Fitch Ratings forecast the bank will lift its policy rate to 35 per cent by end of this year and remain at that level in 2024, there is a high degree of uncertainty about the future pace and duration of monetary policy tightening.

The central bank's net foreign asset position remains significantly negative (minus $67 billion), excluding foreign exchange swaps. Moreover, reserve coverage remains weak given high financial dollarisation and large external financing requirements., Fitch noted.

High inflation remains Turkiye's main risk and policy challenge. Annual inflation rose sharply in August to 58.9 per cent.

Fitch forecasts end-year inflation at 65 per cent, averaging 51.9 per cent this year. The inflation trajectory remains highly uncertain, due to risks of backward indexation, inflation expectations, high commodity prices and additional lira depreciation.

It also projects that growth will reach 4.3 per cent this year before slowing to 3 per cent next year, as reduced credit availability and easing of policy stimulus after the March elections will be somewhat mitigated by earthquake reconstruction efforts and improved external demand.

Near-term political uncertainty has declined after the May general elections, Fitch added.

ALCHEMPro News Desk (DS)