'Turkey's Policies Set To Lower Inflation, Current Gap'

Continuing Turkey's current policy mix will bring down the current account deficit and inflation and spur recovery in its international reserves in 2021 and 2022, according to a senior analyst.

"The consistency of monetary but also fiscal and credit policies will be key to support the economy's rebalancing process and buttress the new economic team's credibility," Erich Arispe, a senior director and Fitch's primary analyst on Turkey, told Anadolu Agency Tuesday.

The revision of Turkey's sovereign rating outlook to stable from negative reflects the return of a more consistent and orthodox policy mix under a new economic team, which has reduced near-term external financing risks, he added.

The Turkish Central Bank has tightened monetary policy and also returned to the one-week repo rate as its main policy instrument in an effort to improve transparency and predictability, he said.

The bank last week kept its benchmark interest rate at 17% after its Governor Naci Agbal raised the rate by 675 basis points since taking office last November.

Arispe added: "Previous regulatory measures to encourage credit growth have been reversed and the Treasury and Finance Ministry intends to lower the 2021 budget deficit target to support a reduction in inflation.

"The Central Bank has renewed its previous long-standing commitment to a floating exchange rate, after large-scale interventions in 2020."

The change in investor sentiment and domestic policy has led to significant lira appreciation, lower risk premium, and some net capital inflows. International reserves have stabilized and recovered slightly, Arispe underlined.

He also noted: "Our view, though, is that the process of rebuilding policy credibility will take time, given limited Central Bank independence, exemplified by the sacking of two of its governors since July 2019, and a recent track record of delayed response to mounting macroeconomic pressures or premature policy easing.

"We believe that a sustained reversal of dollarization will likely be a gradual process. This process will depend on improvements in terms of policy credibility and the sustainability of the current policy mix, as well as the risk of domestic and international political developments that could negatively impact local sentiment."

*Writing by Gokhan Ergocun from Istanbul -