Intensifying economic risks have prompted Fitch to lower its rating on Turkey one notch, sending the country deeper into junk territory as it grapples with rising inflation and a plunging currency.
The rating agency on Friday assigned Turkey a rating of BB, down from BB+, with a negative outlook. Fitch analysts said:
“Fitch believes downside risks to macroeconomic stability have intensified owing to the widening in the current account deficit (CAD), more challenging global external financing environment, jump in inflation and the impact of the plunge in the exchange rate on the private sector, which has significant foreign currency-denominated debt. In Fitch’s opinion, economic policy credibility has deteriorated in recent months and initial policy actions following elections in June have heightened uncertainty. This environment will make it challenging to engineer a soft landing for the economy.”
The decision came at the end of a rough week for Turkish bonds stocks and the lira after president Recep Tayyip Erdogan’s decision to place his son-in-law in charge of the $880bn economy.
The appointment of Berat Albayrak, who is married to Mr Erdogan’s daughter Esra, has compounded investor fears about the management of an economy seen as one of the most vulnerable to changing global financial conditions.
The Turkish president was this week sworn in at the helm of a powerful new system of governance that came into force after last month’s elections.
Mr Erdogan, a self-declared “enemy” of high interest rates, gained sweeping new powers including the right to directly appoint the central bank governor.
The Turkish president has maintained his opposition to high interest rates even amid soaring annual inflation that topped 15 per cent in June. High inflation and Turkey’s wide current account deficit have put pressure on the lira, which has lost around a fifth of its value since the start of the year. That in turn has placed stress on a corporate sector burdened with close to $300bn in foreign-denominated debt.
Turkey has speculative-grade, or junk, ratings from the two other major rating agencies, with a BB- from S&P and Ba2 from Moody’s.