Early Friday morning in Asia, global rating giant Fitch crossed wires while conveying the news to downgrade Turkish long-term Issuer Default Ratings (IDRs) to negative from stable. The rating giant kept the status of BB- for Turkey’s IDR unchanged.

Key quotes (from Fitch)

The central bank's premature monetary policy easing cycle and the prospect of further rate cuts or additional economic stimulus ahead of the 2023 presidential election have led to a deterioration in domestic confidence, reflected in a sharp depreciation of the Turkish lira, including unprecedented intra-day volatility, and rising inflation.

After the 2018 and 2020 crises, Turkey enters this new period of stress from a vulnerable position, with a high degree of uncertainty regarding the economic authorities' policy reaction function, high external financing requirements, deteriorating inflation dynamics and weakened external buffers.

The central bank has repeatedly changed its policy guidance in recent months from a commitment to maintaining positive real rates to focusing on core inflation dynamics, and more recently on narrowing the current account deficit.

We forecast inflation to reach 25% by end-2021 and remain one of the highest among rated sovereigns, averaging 20% in 2022-2023. 

There is a high degree of uncertainty regarding the timing and type of policy response due to the public statements of government authorities, including the president, in favor of low rates and a weaker lira, and the increased visibility of political interference in the central bank decisions and management.

Moreover, the focus of the government on supporting faster commercial credit growth, a key rationale behind the easing cycle in Fitch's view, and the prospect of significant real wage increases for 2022 could reverse the improvement in the current account (forecast to halve to 2.5% of GDP in 2021) and increase external financing pressures.

USD/TRY en-route $14.00

Having reacted to Turkish Prime Minister Erdogan Recep Tayyip Erdoğan’s action, by replacing Finance Minister with his Deputy Nureddin Nebati, USD/TRY remains firmer around $13.69 by the press time. That said, the Turkish Lira (TRY) pair is well-set to refresh the record top of $13.95.

Read: Turkish Finance Minister Nebati says high interest rates won't be a priority

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