ANKARA: Ratings agency Fitch has said political uncertainty in Turkey could increase risk to the country’s sovereign credit profile, but said that the possibility also depends on how policy-making is affected.
Fitch said in a statement on Monday that the inconclusive result of Sunday’s parliamentary election increases Turkey’s near-term political uncertainty and may aggravate tensions regarding economic policy. Turkey’s credit-driven economy has seen fluctuations in the past year due to political wrangling between the government and the Central Bank of Turkey over interest rates. The government has amassed political capital over the past few years thanks to benefiting from low borrowing costs due to the Fed’s low interest rates. The central bank’s low interest rates also boosted domestic growth, but a weakening lira has forced the bank to up the rates, angering President Recep Tayyip Erdoğan.
The Justice and Development Party (AK Party) government lost its majority in Parliament on Sunday, sending the local currency to record lows and plunging the Turkish markets to new depths. The uncertainty, Fitch said, could increase risk to the sovereign credit profile, depending on how policy-making is affected.
Fitch also said coalition-forming negotiations may falter due to ill feeling among political parties. It added that fresh elections can be called if a government is not formed within 45 days, meaning that the political uncertainty could drag on.
It noted that the election heightens the uncertainty about Turkey’s economic policy that had emerged before Sunday’s vote. It added that slowing gross domestic product (GDP) growth had increased tensions regarding efforts to re-balance the economy, cut reliance on net capital inflows, and lower inflation. “In Fitch’s view, economic policy coherence and credibility in Turkey has been weaker than in rating peers, demonstrated by shortcomings in the monetary policy framework and pressure from President Erdoğan on the central bank to cut interest rates.”
