Turkey’s Outlook Downgraded in Uncertain Aftermath Following Coup

Turkey’s sovereign debt outlook has been revised by Fitch Ratings to BBB negative from BBB stable based on political instability following a recent failed coup attempt and rising external debt and inflation.

Following the coup in July, the Turkish government has purged some 70,000 public sector workers, potentially impacting internal checks and balances in the nation, while several terrorist attacks in the country have killed multiple people. This has all served to gauge tourism receipts, which make up some 3% of GDP, a revenue from foreign tourists dropped 41% in this year’s first quarter, year-over-year, Fitch Ratings said. A rapprochement with Russia could help revive tourism, though overall security in Turkey will continue to hamper the sector unless there is some significant change on this front.

Turkey has seen some reductions to its import bill provided by lower oil prices, and its debt/GDP should drop to 32.2% by year’s end, a better figure than the BBB rated peers have at 40.2%, Fitch said. “Security spending and refugees pose expenditure pressures,” said Paul Gamble, primary analyst and senior director at Fitch Ratings Limited. “Fitch assesses the fiscal restraint in the face of multiple political events as impressive compared with rating peers and highlights the importance of the fiscal anchor to the government.”

Still, inflation forecasts of 8.2% by the end of the year are well above Turkey’s peers’ figure of 1.7% and remain an area of ongoing risk. “The central bank has narrowed the interest rate corridor by trimming the top end by a cumulative 200bps since March, although it points to a slowdown in credit growth as evidence of tighter financial conditions,” Gamble said. “Plans to continue to simplify the policy framework and improve communication could over time address risks around policy coherence.”

- Nicholas Stern, editorial associate

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