Political uncertainty in Turkey a risk to credit profile, Fitch says

Ratings agency Fitch has said political uncertainty in Turkey could increase risk to the sovereign credit profile, but that also depends on how policy-making is affected.
Fitch said in a statement on Monday that the inconclusive result of Sundayand’s parliamentary elections increases Turkeyand’s near-term political uncertainty and may aggravate tensions regarding economic policy. Turkeyand’s credit-driven economy has seen fluctuations in the past year due to political wrangling between the government and the Central Bank over interest rates. Government has amassed political capital over a few years thanks to benefiting from low borrowing costs due to Fedand’s low interest rates. Central Bankand’s low interest rates also boosted domestic growth, but weakening lira has forced the bank to up the rates, angering President Recep Tayyip Erdogan.
The government of Justice and Development Party (AK Party) lost majority in the Parliament on Sunday, sending local currency to record lows and plunging Turkish markets. The uncertainty, Fitch said, could increase risk to the sovereign credit profile, depending on how policymaking is affected.
The Fitch said coalition-forming negotiations may falter due to antipathies among parties. It added that fresh elections can be called if a government is not formed within 45 days, meaning that political uncertainty could drag on.
It noted that the election heightens uncertainty about economic policy and personnel that had emerged before Sundayand’s vote. It added that slowing GDP growth had increased tensions regarding efforts to rebalance the economy, cut reliance on net capital inflows, and lower inflation. andquotIn Fitchand’s view, economic policy coherence and credibility in Turkey has been weaker than in rating peers, demonstrated by shortcomings in the monetary policy framework and pressure from President Erdogan on the central bank to cut interest rates.andquot
Fitch stressed that a possible coalition may bring moderating influences into play, but this is far from certain. The uncertainty, in fact, could put the Central Bank to the test, aggravate existing tensions and increase the risk of andquoterratic policymaking or the pressure for looser fiscal policy.andquot This, it said, could lead to widening budget deficits.
If current political uncertainty takes longer than expected, it could increase Turkeyand’s vulnerability to shifts in investor sentiment, already shaken by Erdoganand’s assault on the Central Bank, as US monetary policy tightening draws closer.
The ratings agency said the size of Turkeyand’s current account deficit and associated external financing needs are andquotlong-standing weaknessesandquot in the countryand’s sovereign credit profile, although andquotour ratings assessment acknowledges positive developments and resilience to recent episodes of external stress.andquot
Fitch said the electoral outcome could also have some favorable political impacts, such as maintaining the peace process with Kurds as well as the fact that Erdogan will fail to further centralize the power in the hands of the president. It noted that a coalition government could ease the erosion of governance indicators, which had been weakening after the long period of single-party rule.
andquotFurther erosion of policy coherence and credibility that heightens Turkeyand’s exposure to fluctuations in global risk appetite for emerging-market assets would be negative for the sovereign credit profile, as would a sustained reversal in economic rebalancing leading to a widening current account deficit, higher external financing needs and greater-than-expected increases in net external debtGDP,andquot Fitch concluded.

SOURCE: Today’s Zaman