“Monetary policy has been significantly tightened, international reserves have stabilized and the Turkish lira has appreciated by 18% against the US dollar since early November,” the global rating agency said in its statement.
“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.
The agency highlighted that the Turkish central bank, 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 during the months of November and December.
“Authorities have also reversed previous regulatory measures to rein in rapid credit growth,” it said, adding international reserves have also stabilized and recovered slightly.While Fitch said Turkey’s credit rating is supported by moderate levels of government and household debt, large and diversified economy with a vibrant private sector, it pointed out to 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% in 2021 and 2.1% of GDP in 2022, from 5.3% 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 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.