The Central Bank of Turkey's decision to increase its overnight lending rate shows that the country is aware of the risks presented by currency weakness, high inflation and falling capital inflows, says Fitch Ratings.
The Central Bank of Turkey’s decision to increase its overnight lending rate shows that the country is aware of the risks presented by currency weakness, high inflation and falling capital inflows, says Fitch Ratings.
The rating agency said that balance of payments data show capital inflows essentially halted in May. This is important because with an ongoing current account deficit of 6-7% of GDP illustrating an imbalance between savings and investments, it needs net capital inflows.
Last year the current account deficit narrowed. This year the fall in capital inflows means there is a greater near term risk to the economy, Fitch said.
However, Fitch added that Turkey has favourable growth prospects, with GDP up by 1.6% in the first quarter of 2013. Data on industrial production and imports point to a strong second quarter too.
One challenge the country faces is in ithe value of its currency. The lira has hit all time lows against the dollar recently, but the central bank has limited foreign exchange reserves to intervene in the market to combat this situation.
Increasing the overnight lending rate is meant to bring inflation back in line with targets, but there are potential shocks to the economy remaining, such as social unrest.
Fitch raised Turkey to a ‘BBB-‘ rating from ‘BB+’ in November 2012, and said that its outlook remains “Stable”.