The debt crisis in Europe means the central bank’s margin of error is now “greatly reduced” and the benefits of a so- called interest rate corridor, where it varies lending between rates of 5.75 percent and 12.5 percent, are open to question, Sarah Carlson, a Moody’s analyst, told reporters in a conference call today.
“Having this interest rate corridor; it’s not clear to us why this would be a better approach than simply increasing the policy rate, which would be the straightforward approach,” she said.
The central bank says its policies are slowing the loan growth that widened the current account deficit to a record 10 percent of economic output in September. There may be a “rapid” narrowing in the deficit should the slowdown in lending persist, governor Erdem Basci said on Nov. 25. The rates corridor, unique in emerging markets, gives the central bank flexibility to adjust lending rates in line with market conditions, he says.
“The longer Turkey’s internal and external imbalances remain at a high level, the more downward pressure will build on the positive outlook to the rating, and in extremes on the Ba2 rating itself,” Moody’s said in a report yesterday.
The lira declined 0.4 percent to 1.8359 per dollar at 11:25 a.m. in Istanbul. Yields on two-year benchmark debt rose five basis points to 10.44 percent, rising for the first day in four.
Moody’s rates Turkey Ba2, two steps below investment grade, with a “positive” outlook.
Fitch Ratings, which ranks Turkey at BB+, one step below investment status, cut the country’s outlook to “stable” from “positive” on Nov. 23, citing accelerating inflation and the widening current account deficit. Standard & Poor’s rates Turkey at BB, two steps below investment.
The cumulative current account deficit in the 12 months through September rose to a record $77.5 billion, the central bank said on Nov. 15.
The wider current account gap renders Turkey “vulnerable to balance-of-payment shocks and offsets some, though not all, of the progress that the government has made in improving its own financial strength,” Moody’s said.
Turkey’s debt is equivalent to about 40 percent of gross domestic product and the government plans to reduce the ratio of its debt stock to 32 percent of the gross domestic product in 2014 from an expected 39.8 percent this year, Deputy Prime Minister Ali Babacan said on Oct. 13.
An upgrade of the country’s rating may occur should the authorities pursue fiscal and monetary policies “that reverse the recent growth in internal and, more importantly, external imbalances,” Moody’s said.
Inflation climbed to 7.7 percent in October from 6.2 percent the previous month, compared with the central bank’s year-end goal of 5.5 percent. It has accelerated after the lira declined 16 percent against the dollar this year, making imports more expensive. The impact of a decline in lira on inflation is also a source of concern, Carlson said.
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