Fitch has warned that it could cut Turkey’s sovereign credit rating if the country’s new central bank governor swiftly reverts to cutting interest rates and reignites turmoil in its currency and bond markets.
The lira has plunged more than 9% this week after President Tayyip Erdogan replaced hawkish former central bank chief Naci Agbal with Sahap Kavcioglu, who, like Erdogan, has been critical of raising interest rates.
Fitch said on Tuesday the move had damaged the central bank’s credibility. It only took Turkey off a downgrade warning last month amid signs it was pursuing more orthodox monetary policy under Agbal to curb double-digit inflation.
Asked by Reuters whether reverting to rates cuts could reverse that move and trigger a downgrade, Fitch’s managing director of sovereign ratings, Tony Stringer, said: “It is something that could contribute to us reviewing the rating, that is for sure.”
The real risk, he added, was that Turkish savers, firms and international investors believe the lira, which has lost half its value against the dollar and euro over the last two years, is heading for another heavy fall.
“What we would do in reality is look at the immediate market reaction and think about how damaging that move could be in leading to increased pressure on the balance of payments.”
President Erdogan urged international investors to maintain their confidence in his country on Wednesday, saying the recent volatility in Turkey’s markets did not reflect the “economy’s foundations, dynamics, potential and its future”.
Fitch’s BB- Turkish sovereign rating is currently the highest of the so called “big three” agencies. S&P Global is one notch lower at B+ while Moody’s is a further rung below that at B2, which is the equivalent of a B grade from S&P or Fitch.
The credit default swap (CDS) markets that bond and currency investors use to hedge their risk, are now pricing Turkey as if it were at B- country, a level below even that of Moody’s rating and three notches from Fitch’s current grade.
Economists are also concerned that authorities may have to bring in more formal capital controls if the current turmoil escalates.
Stringer said Fitch’s prior position was always that such controls were unlikely as Turkey is an open economy heavily dependent on trade. For now though is it is being pragmatic.
“In exceptional times you should never rule anything out,” he said.
