What must Turkey do to increase its rating?

As the first signs of economic improvement in Turkey appear in a rather painful way, people’s expectation for a boost in Turkey’s credit rating is naturally rising.

I’ve listened to an interview recently given by Ed Parker, Head of EMEA Sovereign Ratings at Fitch Ratings which seems to take rather positive steps about Turkey’s outlook. Let’s take a look at the important details of this interview by Ceren Dilekçi from BloomberHT:

Parker said that its low level of public debt, recent vibrancy in private sector, and its high growth potential stand out as the strong aspects of Turkish economy. He underlined, however, that its relatively high and volatile inflation, macroeconomic imbalances as well as fluctuations in domestic-foreign politics are Turkey’s weakest aspects.

Parker has also talked about other expectations regarding Turkey outside its NEP 2020 targets, emphasizing that Turkish economy is expected to grow around 3% and that the inflation rate is projected at 12% for 2020. His statements indeed show the ultimate importance of “persuasiveness” that I’ve mentioned many times before in my previous reports.

Despite the fact that negative comments released at the beginning of this year about the performance of Turkish economy in 2019 have been revised in October, Turkey still faces an outside perception problem.

Luckily, Parker spoke fairly and said that Turkish economy has considerably improved over the last 18 months, getting its balance back. He also added that inflation touches single digit again while current balance is running a surplus and the economy overall is growing again. But, he warned us, “Sadly, Turkey failed to come close its NEP target”, which means Turkey has a big challenge ahead: achieve its NEP targets in 2020.

“A Warning to Turkish Central Bank…”

Parker said, “Turkish Central Bank had enough room for a rate cut. Now if CBRT decides to deliver sharp rate cuts in short periods, Turkish lira might lose strength again. CBRT must be very careful with rate cuts so as to avoid harming macroeconomic balance.”

In short, we should pay attention to warnings by a Fitch official whose responsibility is to brief the decision-makers at Fitch about Turkey’s outlook, especially when we are expecting an upgrade. As I have mentioned in yesterday’s report, if the government starts putting pressure on the CBRT for sharp rate cuts, CBRT Chair and his team will have to think very carefully before making any decision. Also, as Turkey keeps moving away from tis NEP targets, it will obviously face heavy criticism by international institutions.

That is the reason why Turkish government must think twice before making any statement on economic targets or on any economic issue for that matter. Criticizing in a guiding, constructive way is the key. It’s hard to figure out who is telling the truth when everyone else is shouting.