Fitch Ratings says that policies aimed at maintaining high economic growth and employment before the 2023 general elections are not always balanced with the improvement in Turkey’s (B/Negative) international reserves. Deeply negative real interest rates, coupled with salary increases and expansionary fiscal and credit policies ahead of the mid-2023 elections, will continue to exert pressure on the lira and international reserves due to the continuing demand for foreign exchange and high current account deficits.
Gross reserves reached $126 billion
External financing, combined with credit rating agency capital flow management measures and regulatory changes, has boosted the recovery in Turkey’s gross reserves to US$126 billion in early 2023.
On the other hand, Fitch underlined that the Central Bank’s reserve structure remains weak and its net foreign asset status is minus $57 billion after foreign currency swaps are issued.
Announcing significant price increases for the public sector and floor price, Fitch Ratings stated that the government will continue to focus on loan growth in priority branches and government-guaranteed loan programs for companies and home loans.
Spending will accelerate in the first half of 2023
However, it was emphasized that although the central government budget deficit decreased to 1 percent of GDP in 2022 (according to GDP assumptions), they expect expenditures to remain at a fast pace in the first half of 2023.
Despite the improvement in the report, it was predicted that Turkey’s external liquidity would remain weak compared to its peers and high external financing need (US$ 189 billion foreign debt due in 12 months from November).
Fitch pointed out that additional risks to international reserves stem from further cash tightening in advanced economies and slowing global growth, and that increased election uncertainty could increase domestic foreign exchange demand.
