Turkey faces ‘fresh market concerns’ over economic policy, Moody’s says

Concerns over Turkey’s policy direction and transparency are disrupting the country’s finances, and have led to the depletion of its foreign reserves, increased dollarisation and a renewed fall in the lira’s value, according to Moody’s Investors Service.

Turkey, the largest economy in the Middle East, has further eased fiscal and monetary policy in response to the Covid-19 outbreak, announcing an initial fiscal package worth about 100 billion Turkish lira (Dh53.5bn, $14.6bn). This is in addition to monetary measures that included the central bank cutting its policy rate by a cumulative 250 basis points to 8.25 per cent in May, as well as open market bond buying.

However, the coronavirus has “exacerbated the sharp deterioration in domestic demand” and the state of the country’s finances will continue to have a “material impact” on its growth prospects over the next two years, the ratings agency said.

“Our forecast includes an economic contraction of 5 per cent in 2020, with the downturn concentrated in the first half of the year, followed by a relatively slow recovery by Turkish standards of around 3.5 per cent in 2021 as a consequence of various structural restraints,” it said.

The International Monetary Fund also estimates the country’s economy will shrink 5 per cent this year after expanding 0.9 per cent last year. The economy is forecast to rebound and expand 5 per cent in 2021, according to the IMF.

Moody’s currently has a B1 rating on Turkey’s foreign and local currency bond debt, with a negative outlook.

The country faces pressures on several fronts, with high unemployment, elevated levels of inflation and a loss of tourism revenues as a result of the pandemic. Tourism accounts for about 11 per cent of the country’s GDP, according to the World Travel and Tourism Council.

The IMF estimates Turkey’s fiscal deficit is set to widen to 8.4 per cent of GDP in 2020, from 5.3 per cent last year. Gross debt is set to increase to 40.4 per cent, up from about 33 per cent last year.

The central bank had been expected to lower its policy rate by a further 25 basis points last week, but kept it on hold, citing inflationary pressures.

A “pandemic-related rise in unit costs have led to some increase in the trends of core inflation indicators”, according to the country’s central bank.

The Turkish lira has declined about 13 per cent in value against the US dollar since the start of the year. However, net foreign exchange reserves, which stood at just $25bn at the time the central bank announced a tripling of its swap lines with Qatar in May, increased to about $31.64 billion as of June 12, according to Reuters.