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depreciation, it is increasing efforts to discourage locals from converting lira into hard currencies. The national lender also appears to be engaging in manipulative and less-than-transparent moves on the market to bolster its foreign reserves—observers fear it will run out of ammunition to defend the lira. Turks have made record moves into foreign currencies since last summer’s lira crisis. Forex deposits and funds, including precious metals, held by Turkish individuals and institutions struck a high of $182bn on May 17. The lira has collapsed some 37% since the beginning of 2018, throwing the economy into recession. This month, Ankara raised a tax on some foreign exchange sales to 0.1%, from zero. The BDDK last week imposed a one-day settlement delay on forex purchases of more than $100,000 by individuals.
To dodge another cut to its sovereign credit rating, Turkey will need to implement a comprehensive and credible economic plan, a senior Moody’s Investors Service sovereign analyst said on May 16. New analysis from the rating agency shows Turkey’s recession, the slump in the lira, upcoming refinancing pressures and dwindling reserves have pushed it to right near the top of the Moody’s worldwide external vulnerability index, Reuters reported, citing an interview with Moody’s managing director of sovereign risk, Yves Lemay. “Failure to put forward a credible broad-based plan to address the structural issues, and in the near-term dampen the market volatility pressure on the lira... that would be a pressure point from a rating perspective,” Lemay reportedly said. Moody’s downgraded Turkey to Ba3—three rungs into junk territory—last August, and kept it on a ‘negative’ outlook to caution that another rating cut could occur within 12-18 months. Ankara is not expected to announce a new economic plan until after the controversial June 23 rerun of the Istanbul mayoral election. “For us, the critical issue is whether this administration has the capacity to move aside the political issues and focus on the economic needs of the country,” Lemay was also cited as saying, adding that the repeat of the Istanbul vote had underscored concerns. “It is another manifestation of the domestic political risk in this instance, and the weakening of the institutions of the country.” Looking at the drop in Turkey’s currency reserves, Lemay said: “When we look at the size of what [sovereign and bank debt] is coming due in the next year against the size of the reserves, it is a signal of significant vulnerability. The amount of reserves is very much insufficient to refinance the external obligations.” According to Moody’s, the Turkish government’s interest payments rose 30.4% in nominal terms last year and almost 50% in the first three months of 2019, due to the weak lira and a rise in payments. Consequently, the rating agency anticipates that the interest payments will increase to around 8.2% of the government’s revenue in 2019 from only 5.9% in 2017.
Fitch Ratings has affirmed Turkey's Long-Term Foreign-Currency Issuer Default Rating (IDR) at 'BB' with a Negative Outlook, the rating agency said on May 3. Turkey's rating and Negative Outlook reflected weak external finances, manifest in its large external financing requirement, low foreign reserves as well as a high net external debt, high inflation, a track record of economic volatility, and political and geopolitical risks, Fitch observed. The rating is supported by strong public finances, a large and diversified economy with a vibrant private sector, and GNI per capita and human development indicators above the medians in Turkey’s peer group. The country’s economy is adjusting to a sharp depreciation of the lira in 2018, which stemmed from the materialisation of external financing vulnerabilities, aggravated by political and geopolitical developments, the rating agency noted. The rapid correction in the current account deficit was seen as a necessary step on the path towards rebalancing and stabilisation. However, significant uncertainties remained around the outlook for an economic recovery and inflation, economic policy implementation, and the impact on the public finances and banking sector, Fitch said.
The external sector remains a major credit weakness. There has been a significant adjustment of the current account, driven by import compression and supported by services exports and underpinned by the floating exchange
79 TURKEY Country Report June 2019 www.intellinews.com