Fitch Ratings will watch Ankara’s policy response to Turkey’s weaker growth outlook and examine whether the relative strength of the country’s public finances can be maintained, the global head of sovereign and supranational ratings at the agency told Bloomberg on January 28.

Hong Kong-based James McCormack said Turkey’s current account deficit and foreign trade gap were more or less resolved but noted that the growth outlook is weak.

Emerging markets face more rating downgrades than upgrades this year as foreign currency-denominated debt levels leave them vulnerable to potentially rising US interest rates and the strength of the dollar, according to Fitch Ratings.

The depreciation in emerging market currencies last year alone raises the burden on governments who have borrowed in foreign currencies, McCormack also said, stating: “The countries that have borrowed in dollars are the countries that are most exposed.”

Walled off
The Turkish government’s easing options in monetary policy have been walled off by the markets. Turkey’s central bank skipped the option of a rate cut at its last monetary policy committee (MPC) meeting held on January 16. The next meeting of the rate-setters is scheduled for March 6.

The focus is currently very much on possible government’s fiscal policy easing moves with news of bankruptcy protection applications in Turkey rather more regular than ministers can be comfortable with. The Erdogan administration has attempted to relax tightened liquidity conditions faced by public lenders, but it is the private sector’s debt load that is worrying local observers.

“Coherent fiscal policy is crucial in a combination of weak activity & high inflation,” Ozlem Bayraktar Goksen of Tacirler Invest said on January 28 in a 2019 economic outlook report for Turkey, adding that “rising interest spending limits the budget capacity to manoeuvre” and “weak economic activity and a lack of one-off items will weigh on revenue performance”.

“The Treasury has been signalling a different domestic borrowing strategy since November. If the cash accounts are strong, the Treasury cancels some of the auctions previously scheduled or taps the markets at much lower amounts than projected. In addition, diversification of the instruments is prioritised with FX-based debt instruments making up the agenda currently,” Goksen also said.

External financing needs high
Annual external financing needs remain high at 23% of GDP and the highest external debt repayments are slated for 2Q19, according to Goksen.

Fitch rates Turkey at BB/Negative together with Guatemala and Vietnam. Moody’s Rating Services rates Turkey at Ba3/Negative together with Bangladesh, Bolivia and Vietnam while Standard & Poor’s rates Turkey at B+/Stable together with Kenya and Greece.

S&P’s next rating review release for Turkey is scheduled for February 15 while Fitch has pencilled in May 3 for its release.

Turkey’s 5-year CDS fell 4.65% w/w and 12.59% m/m to 307 on January 25. However, it was still up 94% y/y.

The Turkish CDS rose to as high as 566 on September 4 from as low as 152 on January 5, 2018.

The Borsa Istanbul’s benchmark BIST-100 index tested record highs of 120,000s through the end of January last year but the index fell to as low as the 84,000s during the worst of the 2018 currency crash in August.

The BIST-100 rose to more than 102,000 on January 28, placing it at the highest level since last May. It made that gain after the 87,000s seen on January 3 and after closing 2018 at 91,270.

The Turkish lira (TRY) weakened to 5.27 versus the dollar at end-2018 from 3.75 at end-2017. It hit an all-time low last August when it tested the 7.20s.

Lira finds 5.20-5.40 band
However, the local currency has pretty much remained under control since mid-November thanks to policy rate hikes supported by the central bank’s open market operations and limitations on lenders’ swap transactions. The local currency has found a new band of 5.20-5.50 since the beginning of 2019.

“The Turkish Lira is up 24% in real terms since Aug. 2018 (black). This rebound is more than sudden stop EMs (blue) typically see, but: (i) the Lira is still 24% down since end-2013 (even with the recent rebound); (ii) it is only moderately overvalued here (fair value $/TRY 5.50),” Robin Brooks of the International Institute of Finance (IIF) said on January 27 in a tweet.

The Treasury’s reshaped financing strategy has put local bond markets under pressure. The 10-year benchmark domestic bond yield fell to the 14%s on January 28 and the 2-year benchmark bonds were in the 17%s, the lowest levels recorded since June.