Fitch Expects Increased Risks With Turkish Lira Reaching a Fresh Low

Turkey has not tightened policy enough to support the lira, which hit a new low on Friday, a senior analyst at Fitch Ratings said, and that the country’s foreign exchange reserves and external financing remain weaknesses.

“more pressure from the currency, double-digit inflation and the erosion of foreign exchange reserves would greatly increase the chances of “raising official interest rates by the end of the year.” Douglas Winslow, the agency’s chief Turkey analyst, said to Reuters

The pound fell by as much as 1.7% to a record low of 8.56 against the dollar, despite the weakening of the US currency, as votes are still being counted in the US elections that were held on Tuesday and are witnessing a close approach. The lira was at 8.52 by 1038 GMT.

Turkey’s bilateral relations with the United States may suffer, as the Democratic candidate Joe Biden came forward and became president, adding to the pressure on the lira, which has fallen more than 30% since the beginning of this year and about 10% in the past two weeks only.

Turkey’s central bank raised interest rates to 10.25% in September and could tighten policy again to prevent a devaluation and combat inflation, lingering around 12%.

But Winslow, director of Fitch’s sovereign affairs team, said in an email that the credit tightening in recent months “was not sufficient to reverse the downward trend in the lira and (to a lesser extent) foreign exchange reserves.”

Turkey is rated high risk by the three major credit rating agencies. While Turkey’s Fitch Ratings is BB- the highest, it revised the outlook to “negative” from “stable” in August, citing erosion of foreign exchange reserves and weak monetary policy credibility.

Winslow said the central bank has “limited independence” from political pressure to cut interest rates and a “record of slow response to events” which raises the risk that a loose policy could fuel external imbalances and market instability.