Page 80 - TURKRptJun19

rate. On a rolling six-month basis, the current account posted a surplus of $2.7bn at end-February, compared with a deficit of $32bn a year earlier.
FX reserves fell ahead of elections. Gross foreign exchange reserves (including gold) rose by $7bn in the first two months of 2019, but fell to $96.3bn in March ahead of the end-of-month local elections, with the decline particularly sharp in net terms to around $28bn, “possibly reflecting efforts to keep the exchange rate stable ahead of the polls”. “Market concerns about the reserves position appear to have contributed to a renewed fall in the lira, which could add to dollarisation pressures,” Fitch said.
Fitch forecasts weak domestic demand and a further improvement in services exports to underpin a current account deficit of 0.7% of GDP in 2019 (the smallest figure since 2002), less than projected net FDI inflows (1.2% of GDP). “Gradual private sector deleveraging should also continue”; at end- February, the external debt rollover by banks was 80% and 93% for the non- bank private sector on a rolling six-month basis, reflecting reduced demand for FX as well as higher borrowing costs. “Nonetheless, the external financing requirement will remain large due to private sector debt repayments,” Fitch added.
“Vulnerable to global investor sentiment” The rating agency estimated Turkey’s total external financial requirement (including short-term debt) at $173bn in 2019, down from $212bn in 2018. “The financing requirement means Turkey will remain vulnerable to global investor sentiment and financial conditions, domestic political and economic policy uncertainty and a pronounced deterioration in relations with the US,” it said.
“Fiscal performance has been hit by the weak economy,” Fitch also observed. In Q1, the central government deficit was TRY36.2bn (0.8% of projected full-year GDP) up from TRY20.4bn a year ago, despite a TRY42.9bn jump in non-tax revenues due to the early payment of the central bank dividend.
“Pre-election stimulus measures affected both tax revenues (up only 5.8%) and primary expenditure (up 33.5%),” the agency added. The government did not revise its fiscal targets (notably a 2019 deficit of 1.8% of GDP) or include new measures in its updated economic reform plan, despite the tough first quarter and an optimistic growth assumption of 2.3%. Fitch assumes policy will be tightened as the election-related stimulus rolls off and other consolidation measures are implemented, but forecasts that the targets will be missed with a central government deficit of 2.4% of GDP in 2019 (general government deficit of 3.1%). “A rebound in the economy will lift revenues in 2020, narrowing the general government deficit to a forecast 2.7% of GDP.”
“The moderate level of gross general government debt (GGGD) is forecast to remain a key rating strength.” Fitch expects GGGD/GDP to rise to 31% at end-2019 from 30.4% at end-2018 owing to the widening of the fiscal deficit and assuming 0.5% of GDP support for state banks. This is well below the forecast median for 'BB' peers of 45.1%. GGGD/GDP is expected to decline to 30.2% in 2020. Fitch's projections do not include further sovereign support for the banks. “Exchange rate volatility poses a risk to debt dynamics,” Fitch said; 47% of central government debt was FX-denominated at end-February. “Various discretionary policy measures were implemented ahead of local elections in March”, the rating agency added.
Risk of “distortions”. “While the government has fiscal space for counter- cyclical policies, the nature of some measures, notably interventions in the food retail market and ramped-up lending by state banks and reported pressure on private sector pricing policy risk creating distortions if maintained and raise questions over the broader policy stance,” Fitch said. “The new economic reform plan published shortly after the elections did not refer to these policy measures and lacked detail, but did provide approximate timelines for individual initiatives,” it noted, adding: “Some of the structural measures in
80 TURKEY Country Report June 2019 www.intellinews.com