Turkey was downgraded to B+ from BB- by Fitch with a negative outlook. Fitch cited high inflation, low external liquidity and weak policy credibility as reasons for the downgrade. The authorities’ lack of policy response in reducing inflation, including “FX-protected deposits, targeted credit and capital flow measures” have continued to weigh on financial stability and macroeconomic risks. Additionally, Turkey’s expansionary policy mix can further increase inflation, weigh on domestic confidence and again hurt its international reserves. Inflation rose to 48% in January and Fitch expects inflation to average 41% in 2022 and 28% in 2023. While Turkey’s forex reserves recovered in November and December 2021, they are still vulnerable and low relative to peers they note – Fitch expects gross reserves to increase from $114.7bn to $118bn in 2022 i.e., 4.2 months of current external payments. Also, while Fitch expects Turkey’s current account deficit to narrow to 1.7% of GDP in 2022 from ~2.1% in 2021, it believes that external financing needs will remain high. Lastly, geopolitical issues like its 2019 purchase of the S-400 Russian missile system, US cooperation with the Kurdish People’s Protection Units in Syria, its Eastern Mediterranean maritime disputes etc. also impact the sovereign. Turkey is now rated B+ by both Fitch and S&P and at B2 by Moody’s.

Turkey’s dollar bonds were trading stable – its 6.125% 2028s were at 93.4, yielding 7.4%

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