Fitch lowers Turkey’s credit rating

Fitch Ratings has lowered Turkey’s credit rating from BB- to B+ by citing risks concerning financial stability.

As reported by Bloomberg HT, Fitch announced the downgrade on Friday (February 11), stating, ‍”Policy-driven financial stress episodes of higher frequency and intensity have increased Turkey’s vulnerabilities in terms of high inflation, low external liquidity and weak policy credibility​.”

According to Fitch, “the risk of additional destabilizing monetary policy easing or stimulus policies ahead of the 2023 general elections is high.”

The statement of the agency has shown that Fitch expects that Turkey’s inflation rate will be 38 percent by the end of 2022 and an average of 41 percent in 2022 and 28 percent in 2023. Fitch has noted that this rate is the second-highest among all Fitch-rated sovereigns.

The rating agency expects that the gross reserves of Turkey’s Central Bank will increase to 118 billion USD in 2022, “as export rediscount credits, FX conversion of deposits, a new FX swap with the UAE and 1 billion euro deposit from Azerbaijan’s Sofaz will more than offset continued current account deficits and domestic FX demand, and limited portfolio inflows.”

Fitch Ratings has also predicted that the growth rate of Turkey’s economy will slow down from its current level of 11 percent to 3.2 percent in 2022. The agency has cited “balancing still favorable external demand dynamics, recovery in the tourism sector and an accommodative policy stance against tighter financing conditions, deterioration in consumer sentiment and the negative impact of a weaker exchange rate and high inflation.”

About credit ratings

A credit rating is broadly defined as an evaluation of the credit risk of a prospective debtor, predicting their ability to pay back the debt, and an implicit forecast of the likelihood of the debtor defaulting.

The credit rating represents an evaluation of a credit rating agency of the qualitative and quantitative information for the prospective debtor, including information provided by the prospective debtor and other non-public information obtained by the credit rating agency’s analysts.

Ratings are assigned by credit rating agencies, the largest of which are Standard & Poor’s, Moody’s and Fitch Ratings. They use letter designations such as A, B, C. Higher grades are intended to represent a lower probability of default. DBRS’s long-term ratings scale is somewhat similar to Standard & Poor’s and Fitch Ratings with the words high and low replacing the + and −. It goes as follows, from excellent to poor:

AAA, AA (high), AA, AA (low), A (high), A, A (low), BBB (high), BBB, BBB (low), BB (high), BB, BB (low), B (high), B, B (low), CCC (high), CCC, CCC (low), CC (high), CC, CC (low), C (high), C, C (low) and D. (TP/SD)