London-based credit rating agency Fitch ICBA downgraded Turkey's long-term local currency rating on Thursday, February 22, after the country abandoned its exchange rate peg.
The long-term local currency rating was cut to "B-plus" from "BB" and was placed under review for a possible downgrade. The foreign currency rating remained at "BB-minus" but was also put on review for a possible downgrade.
"Turkey's decision to abandon the main stay of its current IMF program means that the economy has moved into uncharted territory," Fitch said in a statement. "Drawing on its experience of the Asia and Brazil crises, the agency believes the exchange rate will overshoot by a wide margin, forcing interest rates and inflation to potentially new highs and rendering budget projections for 2001 wholly obsolete," it added. "Henceforth, the evolution of Turkey's sovereign credit ratings will hinge critically on the government's ability to regain control of events."
Fitch ICBA said Turkey would have to make a "disproportionate" policy response, endorsed by the IMF, to avert "a damaging inflation-devaluation spiral in the current environment."
The agency said it was concerned that the policy-making framework in Turkey was much weaker than in Brazil, for example, while the risks of the coalition government breaking up were much greater. "With so much political capital now lost, it will be hard for the government to restore its credibility with investors," the agency said.
Fitch said its rating action reflected the acute domestic funding difficulties likely to face the government in coming months and the banking system's exposure to interest rate and exchange rate shocks.
"The devaluation has inflicted losses on the banking system and raised the probability that the government will have to expend considerable resources bailing out individual banks."
The agency said it was encouraged by Turkey's record on structural reform, noting that the government had passed a bill liberalizing the electricity sector in the past few days.
Turkey had a record of meeting its external obligations, the agency said. But "Turkey's external liquidity position is still comparatively weak and could easily fall victim to severe capital flight in coming days and weeks," it warned. "Everything now hangs on a credible and timely policy response."
New York-based rating agency Moody's Investors Service downgraded its outlook for Turkey earlier, blaming the failure to restore financial stability after a banking crisis erupted last year.
The outlook for Turkey's "B1" rating on foreign currency debt and "B2" rating on bank deposits was cut to "stable" from "positive." The New York-based agency's report was issued hours before Turkey abandoned the exchange rate peg. — (AFP, Paris)
© Agence France Presse 2001
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