Why Turkey’s credit rating is not improving ?

Turkey’s credit rating has reached rock bottom for the first time in a long time. But, things were quite different indeed in the early 2000s. Back then, we had turned our faces to the West. The banking reforms had been all properly implemented and we had hopes about the future of justice and equality in Turkey.

People used to appreciate us when we went abroad. Setting a good example for all our neighbours, we used to make the production activities our top priority. Then, things have suddenly changed. As a result of USD/TRY’s almost 1-year trend of stability, our unnecessary boasting about Turkey’s rapid GDP growth, our growing incapability of combining our principles with our gains and interests, and the very convenient environment where literally anyone can start a construction business, we have sadly played into others’ hands, hence the huge drop in our credit score.

Last week, I was really wondering what Fitch would decide about Turkey’s credit rating. And then came the moment of truth, when Fitch affirmed Turkey’s rating “BB-” with a stable outlook. I didn’t exactly expect Fitch to upgrade our rating but it was rather interesting that it kept the outlook unchanged.

Fitch said in its statement: “Economic growth is recovering strongly, inflation has fallen from 20% at the beginning of last year, the current account has improved and external risks, although still high, have eased”. I wondered whether Fitch hasn’t chose to revise Turkey’s outlook from stable to positive because of Turkey’s fragile economy, but to tell you the truth, I couldn’t come up with a satisfying answer.

“We continue to estimate Turkey’s trend rate of growth at 3.9% for 2020 with 0.8 points increase compared to the previous year”, Fitch added. In my previous reports, I mentioned that I was expecting a growth trend of 4-5%. Most probably, Fitch will raise its forecast as well. In its statement, Fitch says also that their upward revision of Turkey’s growth forecast is mostly caused by the gradual improvement in investments and private consumption while the real effective exchange rate adjustment and private sector deleveraging have been the drivers behind this recent economic amelioration. If so, why hasn’t Fitch revised Turkey’s outlook from stable to positive? Maybe the rest of the statement can give us a clue about this.

“Apparently, we still have a long road ahead…”

Fitch forecasted that Turkish economy is expected to grow by 4% in 2021, but it has also warned about the fact that Turkey’s desperate need for foreign funds remains as a major risk. The agency stated that the ratio of the current account deficit to the Gross Domestic Product is expected to reach 0.9% in 2020 and 1.8% in 2021.

Also, Fitch doesn’t believe that inflation rate will hit single digit by the end of 2020, which is expected to touch 10.5% by the end of this year, and around 10% in 2021. Apparently, Fitch didn’t upgrade Turkey’s outlook because it doesn’t actually believe that Turkey will able to reach its NEP targets.

Fitch saved the best for last, “Geopolitical risks continue to weigh on Turkey’s rating.” I guess we will have to wait for a little while longer to see an increase in our credit rating.