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Fitch warns of uncertainty as Turkey heads to elections

Credit agency says there is no immediate risk to public finances

31.08.2015 - Update : 31.08.2015
Fitch warns of uncertainty as Turkey heads to elections

by Andrew Jay Rosenbaum

ANKARA

 Credit agency Fitch Ratings warned that new elections in Turkey could cause uncertainty that could hurt the Turkish economy.

"New elections in Turkey may prolong rather than end the political uncertainty that threatens to exacerbate Turkey's domestic and external policy challenges," Fitch said in a statement late on Friday.

After June's parliamentary elections failed to provide a single majority, discussions between the four parties represented in Parliament to form a coalition government proved fruitless. 

This has led to the formation of an interim government ahead of snap parliamentary elections on Nov. 1. 

"The uncertainty has coincided with the breakdown of the peace process with the militant Kurdistan Workers' Party (PKK) and the start of military operations in Syria. This could be negative for the sovereign risk profile in the medium term, for example, if there were an escalation of violence within Turkey, or if the country is drawn into a protracted regional conflict," the statement said.

The PKK is designated a terror organization by Turkey, the U.S. and the EU.

Political risk in Turkey has long weighed on the country's sovereign rating; political uncertainty has helped undermine economic performance, according to the statement. 

"More positively, we do not believe that a political impasse presents an immediate risk to the public finances, which have been kept on a close rein. Pressure for a moderately looser fiscal stance may increase if the economy slows further, but political commitment to fiscal restraint appears broad-based," the statement said.

Fitch complained that central bank measures to support the Turkish lira have not sufficed.

"The Central Bank of the Republic of Turkey left interest rates unchanged on August 18, and published its 'roadmap' for the period of global monetary policy normalisation. This includes narrowing the interest rate corridor, which could facilitate monetary tightening, and measures that aim to provide foreign exchange liquidity to banks while limiting the impact on reserves. Nevertheless, the roadmap is lacking in detail, and its release offered little support to the lira," the statement said.

The Turkish lira has lost about 20 percent of its value against the U.S. currency since the beginning of the year.

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