Türkiye statement from Fitch: Not the dollar, but the interest may be an anchor

International credit rating agency Fitch Ratings announced that it expects the policy rate to become a tool for policy makers again in Turkey. “We expect the policy rate to become a tool for policy makers to reduce the pressure on the lira and reserves and fight inflation in Turkey,” Fitch said in its statement.

Pointing out that the weak TL may strengthen the expectations of moving away from the exchange rate as a nominal anchor in order to reduce inflation and avoid dollarization, Fitch also implied a continuation of the rise in the dollar rate.

There was also a message from Fitch regarding Turkey’s credit rating: “It will take time to evaluate the anticipated change in Turkey’s economic policy.”

Credit rating agency Fitch has published an evaluation report on the Turkish economy. The report stated that after the election, the government signaled a policy change in the economy. However, it was emphasized that policy makers face complex challenges and therefore time is needed to understand the impact of policy changes. The report also stated that “Policy rate can become a tool used by policy makers to ease pressures on lira and reserves and fight inflation”.

“Şimşek’s Reputation Indicates Rational Ground Promise Will Be Kept”

Referring specifically to the new economic management, Fitch said in the report, “The appointment of Mehmet Şimşek as the Minister of Treasury and Finance and the change of leadership in the central bank point to a sharp policy change. Şimşek has gained a reputation in the financial markets with its past performance and has promised to return to price stability, which is its main goal, which focuses on the “rational management of the economy”, and drew attention to the steps that the new economy staff under Şimşek’s management will take to implement the message of “return to rationality”.

The report also mentioned that the TL, which lost value rapidly after the elections, could help in reducing the current account deficit, and stated that “Policy interest rates can become a tool used by policy makers to ease the pressure on the lira and reserves and to fight inflation.”

Mentioning that the depreciation in the lira may have a negative effect on the current account deficit, as well as posing a risk for inflation, analysts said that inflationary pressures may increase for this reason. The extreme volatility of the lira may raise concerns about bank deposit stability, but current capital flow management measures may continue to offset the pace of depreciation from local currency demand in the near term, the report said.

“Building Credibility May Take Time”

“Turkey’s credit analysis is based on policy measures focused on controlling inflation, managing currency pressures and rebuilding external buffers. However, it may take time to reconstruct policy credibility and predictability”, pointing out that the confidence in the new economy management will not happen quickly and unconsciously despite Mehmet Şimşek. He pointed out the risks by stating that Şahap Kavcıoğlu, who was the CBRT Chairman before Hafize Gaye Erkan, who was appointed, still has a voice and position in the economy management.

Fitch made its latest credit rating assessment for Turkey in February 2022, with a continuation rating from B+ to B with a negative outlook. On the Moody’s rating scale, Turkey’s credit rating was B3 and the outlook was stable, while the S&P maintained its B rating in 2023 and turned the outlook to negative.

Changes in Turkey’s credit rating since 1996