Turkish authorities must act decisively to stamp out inflation and control the impact of a slump in the lira to avoid losing the positive outlook placed on their debt by Fitch.
Fitch analyst Ed Parker warned the government that indications of a more populist policy approach ahead of forthcoming elections may be shed by the ratings agency after a retrenchment in global risk appetite reduced Ankara’s wiggle-room.
“The positive outlook doesn’t look as secure as it did a couple of months ago, and the Turkish authorities will have to act carefully,” Parker said. “If the authorities don’t act in that way with a positive policy response then the next move could be a negative ratings action.”
Parker emphasised that recent market moves, during which the Turkish lira was the worst performer sliding more than 15% in May, aren’t in themselves enough to merit a change in rating. Nevertheless he attacked signs of backsliding in fiscal policy such as a VAT reduction for the textiles industry and higher-than-budgeted wage hikes for public services.
“The government’s gone into a sort of pre-election mode and the reforms seem to have stalled,” Don Egginton, chief economist at the Daiwa Institute of Research in London, told Emerging Markets. “A year ago things looked OK, now they seem a bit iffy.”
The Turkish economy has been in investors’ firing line because of its swelling budget deficit, which is anticipated to rocket to $30 billion this year. In addition, following an couple of years of impressive inflation performance, price-growth is reaccelerating, wrecking central bank hopes of cutting the rate to 5% by end 2006.
In response to data showing inflation surging above 9%, new bank governor Durmus Yilmaz, won praise from investors with a surprise 175% hike in interest rates. Parker, however, appeared unconvinced by the action: “We’ll wait and see whether it’s tactics were correct in going for a move deliberately against what the market expected. Maybe it was a good move, maybe it smacks a little bit of panic.”
The risk for the central bank is that in trying to establish their anti-inflation credentials, they simultaneously squeeze growth and push up the government’s debt repayments.
More long-term, the country’s fortunes, at least as far as the market is concerned, will hinge on its relations with the European Union. Recent events have revealed the fragility of membership hopes after Cyprus managed to insert an explicit extra hurdle into the process by insisting on the fulfilment of a customs agreement allowing its nationals access to Turkish ports.