Page 18 - BNE_magazine_10_2020

18 I Companies & Markets bne October 2020
Chart by @akcakmak.
record levels. This was certainly the case in 2019 when import compression and a very strong tourism season helped to shift Turkey's current account deficit into surplus.
However, in light of the pandemic's impact on the tourism industry, Turkey will not reap this benefit next year, and Moody's base case is that globally the industry will only make a partial recovery to pre-pandemic levels in 2021.
Dollarisation is a significant issue for Turkey that heightens the risk of a balance of payments crisis; the Turkish economy has the second-highest dollarisation vulnerability indicator in the single B-rated universe. The country de-dollarised in the early 2000s because of growing confidence in the domestic economy. However, in recent years Moody's has observed progressively higher levels of dollarisation, and since 2018 the share of deposits that are denominated in hard currencies such as USD or EUR have accounted for over 50% of the total deposits in the banking system.
Institutions
The second factor informing the rating action is Moody's view that Turkey's policy credibility and effectiveness, elements that the rating agency considers a governance factor under its ESG framework, have weakened.
At the moment, political pressures and limited central bank independence, a slow reaction function of the monetary authorities, and a lack of predictability in their reaction function increases the probability of a disorderly exchange rate and economic adjustment.
The policy rate is now negative in real terms, inflation remains well above target, and inflation expectations are rising. However, the central bank has taken only modest action to tighten monetary policy. The longer this goes on, the more likely it is that there will be continued downward pressure on the lira.
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Moreover, Turkey's longstanding commitment to a floating exchange rate since 2001 was an important institutional source of insulation from a balance of payments crisis because the exchange rate could act as a shock absorber. Given the scale and number of interventions and regulatory actions in the FX market this year, it is difficult to see the lira as being governed by a floating currency regime.
Turkey's structural economic challenges are clear, and Moody's believes that the Turkish authorities understand that the econo- my's chronic shortfall in domestic savings generates significant imbalances and an over-dependence on foreign sources of capital.
Turkey also suffers from labour market rigidities that inhibit job creation. Productivity is also weak, which in some sectors underpins structurally high inflation.
International observers such as the EU, IMF, and OECD point to weak educational outcomes as a key driver of weak productivity and employment outcomes.
Policy initiatives in recent years have fallen short in terms of addressing the structural underpinnings of Turkey's macroeconomic problems, pointing to a lack of willingness or capacity to tackle these economic vulnerabilities.
Moreover, growth-supporting measures have gone in the opposite direction and have relied on credit growth (and fiscal or quasi-fiscal stimulus).
Starting in the second half of 2019, state-owned banks were encouraged to expand credit creation to counter the economic downturn. They adopted special programmes to assume and restructure credit card and other consumer debt at extended maturities and below market rates. Credit growth has remained high in 2020 due to measures taken by the banking regulator to support domestic demand during the pandemic.