Fitch revises Turkey’s outlook from negative to stable

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Fitch Ratings revised Turkey's outlook to stable from negative and affirmed its credit rating at "BB-" on Friday (February 19).

"Monetary policy has been significantly tightened, international reserves have stabilized and the Turkish lira has appreciated by 18 percent against the US dollar since early November," the global rating agency said in its statement, as reported by the state-run Anadolu Agency (AA).

"Turkey's return to a more consistent and orthodox policy mix under a new economic team has helped ease near-term external financing risks derived from last year's falling international reserves, a high current account deficit and deteriorating investor confidence," it added.

It also noted that the Central Bank of Turkey, under its new leadership, has simplified monetary policy to improve transparency and predictability, strengthened its communication strategy and increased its tightening by raising interest rates by 675 basis points in November and December.

"Authorities have also reversed previous regulatory measures to rein in rapid credit growth," the agency said, adding that international reserves have also stabilized and recovered slightly during this period.

While Fitch Ratings said that Turkey's credit rating is supported by moderate levels of government and household debt as well as a large and diversified economy with a vibrant private sector, the agency also pointed out weak external finances, economic volatility, high inflation, increased dollarization, in addition to political and geopolitical risks.

Turkey's current account deficit is expected to fall to 2.9 percent in 2021 and 2.1 percent of GDP in 2022, from 5.3 percent in 2020, due to slower domestic demand and reduced gold imports, according to Fitch.

Although Turkey's banking sector is vulnerable to exchange rate volatility, the banking system has demonstrated relative resilience to the COVID-19 pandemic and financial markets shock last year, and it has sufficient foreign currency liquidity to meet short-term external debt, it added.

Fitch said that Turkey's credit rating could be upgraded if there is a reduction in external vulnerabilities, decline in inflation, monetary policy credibility is rebuilt, and geopolitical risks are reduced. (HA/SD)