How will Turkey’s credit rating rise?

Here’s the deal: Turkey will likely drift away from its inflation target unless exchange rates are not brought under control soon. In such case, we should expect interest rates to go up as well.

The reflections of the Supreme Electoral Council’s decision were pretty negative as expected, especially in Europe. I watch international news channels for hours every night, sometimes until morning. As a matter of fact, some of the comments appear to be quite ‘above-the-line’. And apparently, Foreign Funds have decided to act based on the comments appearing on the western press. I will continue to keep close track of market fluctuations and their side effects until this turmoil calms down.

On the other hand, Fitch’s latest statement was pretty interesting given its visible impact on rates and risk premiums. Pointing out that there have been some serious developments regarding Turkey’s need for foreign financing, Fitch describes our economy policies as “uncertain and vague”. They also underline that sensitivities arising out of political and geopolitical risks may negatively impact economic growth.

“Current account deficit, inflation and structural reforms…”

“But, what should Turkey to improve its rating?” Here’s Fitch’s answer:

  • They said, “current account deficit need to be kept at a lower for the long term” but there’s a direct correlation between GDP growth and current account deficit. Therefore, they must have meant that current account deficit should be kept stable while growth is slowing down, which actually depends on the movement of energy prices.
  • “Inflation must hit single digits” Fitch said. I guess we’ll have to wait for a very long time to see that happen because of the reasons I mentioned above.
  • “We need to make sure that Turkish economy has overcome the huge schlock it faced over the last year.” I think Turkish economy is currently recovering from this shock, it, however, seems still fragile.
  • Fitch also added that this process needs to be sustained by structural reforms as well.” They mean the three pillar of “justice, freedoms and education”, which should be followed by economic reforms.

Here’s what I understand from all of this: Turkey has a lot of ground to cover in order to improve its credit rating as some of these criteria seem to be very hard to fulfill while in total they seem to at Fitch’s discretion. In short, Turkey should better get ready to face the upcoming hard times.

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