Fitch, the international credits rating agency, announced that it has downgraded Turkey's long-term local long-term rating from to “B+” to “B”, and the country’s long-term foreign currency rating from “BB-” to “B+”. Commenting on the ratings change, sources at Fitch said their decision is reflective of the overly slow progress being made in coming up with a viable stabilization program for the Turkish economy, which has been caught in a financial crisis since February. Such a program must be predicated on structural reforms, the agency added, as well as a clearly stated macro economic policy framework.
In the accompanying release, Fitch said that it welcomed the Turkish government’s statement of March 19, which outlined a general framework for the reform program, placing special emphasis on restructuring the banking sector and accelerating privatization. But, said the agency, the framework lacks the detail necessary to convince the international investor community of the economy’s stability.
Fitch’s statement criticized the damaging lack of urgency in putting a more convincing reform program in place, which reflects difficulties in achieving political consensus and the absence of a robust policymaking framework in Turkey. Moreover, the agency stated, recent political developments do not bode well for reaching early agreement on reform measures.
Turkish political leaders have been sending mixed signals about the prospects for expediting a new program in the next few weeks. And while there have been calls from some party leaders to rally behind the Economy Minister's proposals, Fitch felt that there is still significant political disunity among the coalition.
Time, Fitch pointed, is something that Turkey does not have in ample supply. Ankara’s financing requirements are projected to rise sharply in May and June, with domestic debt rollovers equivalent to three percent and five percent of GDP respectively. In the event that a new stabilization program is not in place by then, the agency stated, the government would likely continue to face very high interest rates on its borrowing. This would swiftly render the fiscal deficit unsustainable.
Turkey's external liquidity position is still deteriorating, with official foreign currency reserves down from $28 billion in mid-February to around $19 billion. And with banks' external debts now enjoying a sovereign guarantee, sovereign external liabilities have risen. These considerations, coupled with the absence of a credible and timely policy response to the crisis, Fitch stressed, prompted a downgrade of the foreign currency sovereign rating to “B+” from “BB-”.
The International Monetary Fund also is showing real discomfort over the Turkish government’s reluctance to get a stabilization program swiftly into place. After meeting with US and IMF officials last week, the new Turkish Economic Minister, Kemal Dervis, said the Turkish Parliament should approve some 15 reform laws and legal amendments in two or three weeks to get Western support for the new economic program. But several days later Turkish Prime Minister Bulent Ecevi, backtracked, saying that it is physically impossible to approve all 15 pieces of legislations in such a short time.
Commenting, Thomas Dawson, the director of the IMF’s external elations department, was reluctant to adjudicate between the two Turkish officials. “We did indicate, coming out of the meeting that Dervis had with the [IMF] managing director that we did agree with the Turkish authorities that it is critical for Turkey to establish a convincing program. The framework for that program is laid out in the March 19th agreement; that is in the framework agreement, which provides the road map. I don't think it's appropriate at this time to be talking about how many bills have to be passed by what period of time.”
“The next step is them working out more of the details of their program,” Dawson continued. “Remember, we do have a resident representative there, so there is continuing contact on the ground. And precisely when a mission would be sent, I cannot identify. It is a time frame. Whether it is two weeks or a little bit more, I don't know, I mean, in terms of their own deadline. But the next step after they've worked out the program, would be for a mission to go out, and that was anticipated back when the framework agreement was signed.”
Dervis has indicated that Turkey needs $10 billion to $12 billion to cover its financing needs over the coming year. It is hoping to get a good portion of that sum from the IMF. — (Albawaba-MEBG)
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