Turkey outlook revised to negative at Fitch as reserves drop

Istanbul: Turkey's outlook was revised to negative from stable by Fitch Ratings, which said that factors including a depletion of foreign-exchange reserves and weak monetary policy credibility have "exacerbated external financing risks."

The ratings company affirmed Turkey's credit score at BB-, three levels below investment grade. That's on par with Brazil, Jordan and Armenia.

"There have been large currency interventions to defend the lira," Fitch said in a statement. "FX interventions have weakened policy credibility."

Fitch also cited the drop in real interest rates for the change in outlook.

Turkey's central bank has been running down foreign-exchange reserves to contain the lira's slide, while unwinding measures that flooded the market with credit. It's also left interest rates at levels below inflation, opting instead to tighten liquidity by relying on less conventional methods to increase borrowing costs.

Turkey Tightens Policy by Stealth and Opts Against Raising Rates

The $750 billion economy is expected to shrink 4% this year, according to a survey of 23 economists by Bloomberg published last month. A lockdown to curb the spread of Covid-19 shuttered businesses across Turkey, while the pandemic has also disrupted global supply lines.

In a report released in July, Fitch said the decline in foreign-exchange reserves added to weak monetary policy credibility, while negative real interest rates increased risks of further external pressures.

Foreign-currency reserves dropped to $45.4 billion as of Aug. 14 from $81.2 billion at the end of last year.