Turkey's relatively low debt levels and experience at riding out financial market turbulence are helping the country withstand the current coronavirus and currency strains, Fitch's top analyst said on Friday.
Douglas Winslow said the already-junk BB rating's main exposure to the problems was Turkey’s large external financing need relative to its low foreign exchange reserves, compounded by the weak credibility of its central bank.
“The rating already has a lot of adjustment factored in for these weaknesses,” Winslow said in an interview, explaining that it was three notches lower than where it potentially could be without the issues.
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The outlook has, however, changed dramatically since Fitch last reviewed Turkey in February.
The coronavirus pandemic means Fitch now expects the economy to contract at least 2 percent in 2020 rather than see spritely growth, while a savage bout of lira weakness has burned FX reserves and is making refinancing over $170 billion of dollar-denominated debt in the next 12 months a more daunting task.
“One of the rating (downgrade) triggers would be if we were to see external pressures feeding through to more acute financing stress for banks and corporates – but at the moment we are not seeing that,” Winslow said.
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The unavoidable rise in government debt should also be manageable for the rating which carries a ‘stable’ outlook.
“We now think government debt will increase above 38 percent of GDP but at a BB level that is still a relative rating strength,” he added. “The BB median is 51 percent –so we think that Turkey still has some fiscal space.”
If the pressure on the lira resumes, Fitch thinks authorities will revert to the playbook of past crises.
“We don't rule out further capital controls,” Winslow said, “but we think a more likely scenario would be what we saw last time - interest rate hikes, albeit late in the day.”
There could be continued interventions in financial markets such as to make it harder for traders to ‘short’ the lira, administrative measures to dampen imports, higher tariffs or tax measures to support the current account position.
An International Monetary Fund program is highly unlikely, however. “We think the president would want to avoid that at all costs,” Winslow said.
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