Fitch cuts Turkey to five notches below investment grade

Fitch cuts Turkey to five notches below investment grade
The pressure gauges on Turkey's economy threaten to blow. / Blauer elephant, cc-by-sa 3.0
By Akin Nazli in Belgrade July 10, 2022

Fitch Ratings has downgraded Turkey’s sovereign rating by one notch to B with a Negative outlook, the ratings agency said on July 8.

Following the change, Fitch Ratings rates Turkey at B/Negative, five notches below investment grade. Moody’s Rating Services rates Turkey at B2/Negative, five notches below investment grade, while Standard & Poor’s has Turkey at B+/Negative, four notches below investment grade.

More downgrades are on the way.

Fitch forecasts official annual inflation in Turkey to average 71% in 2022, the highest inflation level of Fitch-rated sovereigns. The ratings firm said Turkey's inflation trajectory remained highly uncertain due to increased risks of backward indexation, rising expectations and additional lira depreciation, as the exchange rate pass-through has increased in both speed and magnitude.

Fitch expects Turkey’s overall policy mix to remain overly accommodative at least until the 2023 elections that must take place by June at the latest.

There is a risk that in the event of weaker depositor confidence or a deterioration in the until-now resilient access of banks and corporates to external financing, official international reserves would come under pressure, as a significant portion of banks' foreign currency assets is held in the central bank, according to Fitch.

Earlier this week, Fitch Ratings said in a report that Turkish insurers are facing one of their most challenging operating environments of the past decade with earnings and capital adequacy likely to come under severe strain in 2022-2023.

The effects of macroeconomic deterioration, soaring inflation and the continuing price cap on motor third-party liability (MTPL) insurance could push some insurers below minimum regulatory solvency levels, forcing them to raise capital or to be acquired by stronger competitors.

Turkish CPI inflation rose to over 70% in May and Fitch forecast that it would remain very high (end-2022: 60%, end-2023: 55%).

Sustained inflation at such high levels will have significant negative implications for insurers, pushing up the cost of claims and potentially leading to reserve shortfalls on longer-tail business lines.

It will also erode customers’ disposable income, weakening their ability to buy insurance.