Fitch Ratings has affirmed Turkey’s Long-Term Foreign-Currency Issuer Default Rating at ‘BB-‘ with a Stable Outlook, according to a press release.
Turkey’s ‘BB-‘ rating reflects weak external finances, a track record of economic volatility, high inflation and political and geopolitical risks, it also said.
These factors are set against Turkey’s large and diversified economy, GDP per capita and Ease of Doing Business indicators that compare favourably with ‘BB’ medians, and moderate levels of government and household debt, it added.
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, supported by the real effective exchange rate adjustment and private sector deleveraging.
The relative resilience of the banking and corporate sectors to the 2018 crisis contributes to our expectation for a ‘V-shaped’ recovery.
Fitch forecasts GDP growth of 3.9% in 2020, after 0.4% in 2019, driven by private consumption and a more gradual recovery in investment. Lower interest rates and a sharp pick-up in credit are fuelling domestic demand.
Private bank lending is growing at 27% and consumer credit 46% (on a 13-week annualised basis), and we expect full-year aggregate credit growth above 15%.
Pent-up demand, mildly positive labour market dynamics, a 15% minimum wage hike, and recovering confidence indicators also support stronger domestic demand. We forecast similar GDP growth in 2021, of 4.0% compared with the ‘BB’ category median of 3.4% in 2020-2021. We continue to estimate Turkey’s trend rate of growth at 4.3%.
Turkey’s large external financing requirement remains a source of vulnerability, but has reduced to around US$170 billion (including short-term debt) or 161% of foreign exchange reserves in 2020, from US$211 billion in 2018.
This is driven by the current account moving to a surplus of 0.2% of GDP in 2019 from a deficit of 3.5% in 2018, mainly due to import compression, although export growth is also supported by the real effective exchange rate (12% below the end-2017 level) and buoyant tourism.
Fitch forecasts the current account returns to deficit, of 0.9% of GDP in 2020 and 1.8% in 2021, as recovering domestic demand lifts imports and, to a lesser extent, high inflation begins to erode competitiveness gains.