Difficulties growing despite Fitch’s positive report

Difficulties growing despite Fitch’s positive report

A long-awaited decision on the markets by the international rating agency Fitch was made public on Friday, Oct. 3.

The fact that Fitch did not change its investment-grade ratings and maintained its stable outlook on Turkey came as a positive surprise. The markets expected the outlook to turn from stable to negative. In normal circumstances, the markets that will open today after Eid al-Adha would be positively affected by this news.

However, it looks like the positive news from Fitch will not have the desired effect.

One of the reasons is U.S. employment figures that were made public the same evening. When the figures turned out to be more positive than expected, the dollar gained value against all other currencies. Therefore, it became immediately apparent that Fitch’s decision wouldn’t have an impact in Turkey on the foreign exchange currencies.

Not much attention was given to an IMF report that was made public the same day, even though important concerns about Turkey’s economy were included.

It’s not clear to what degree this report will be taken into consideration by the markets when they open today.

The political atmosphere is also growing tenser, in addition to these economic inputs, with reflections of the Islamic State of Iraq and the Levant's (ISIL) attacks on Kobane increasing both at home and abroad.

While it is expected that Turkey's peace process with the Kurds will be negatively affected by these attacks, developments in the coming days will be particularly important and will be watched closely by the markets. Any increase in social strife could worry the markets.

In addition to protests in the east and the southeast, there are also increasing anti-ISIL protests in big cities, targeting the government because it is seen as not making a move against the group. The increase in social incidents could pose a serious risk for the economy, which is already standing at a critical stage.

Important warnings from the IMF

Even if not taken into consideration by the markets, the IMF’s recent report underlines the fragile points that will be highly debated in the coming period. In summary, it states that Turkey will only be able to grow at 3.5 percent annually with the current savings rates and the decreasing foreign capital inflow. It also underlined that it would be impossible to avoid the middle income trap with this growth ratio.

The IMF talked about the necessity of implementing the structural reforms endorsed in the mid-term program to increase Turkey's growth potential. In fact, it also said that this would not be enough and that a package of serious measures should also be implemented until an outcome is secured with the structural measures. For that, it asked for decreased spending, consolidated monetary discipline and, although it didn’t say so explicitly, noted the importance of having all these measures under one package.

In the meantime, the report underlines that Turkish banks are heavily indebted, which also increases current risks, and it also added that the real estate sector could sail into dire straits in the upcoming period.

In short, our economic situation is getting tougher.