"Length Reuters" - Turkey's radical new plan to support the lira and discourage dollarization comes with clear potential costs, says one of the top sovereign analysts in Fitch on Wednesday. It's time to check whether it has worked or not.
Fitch warned Turkey's BB- rating for a slowing down this month because a weak lira threatened to run out of control.
On Monday, the president of Turkey, Tayyip Erdogan announced measures to try and stop the rout, including handouts if inflation exceeds Turkish banks' savings rate; these include holding sovereign bonds and increasing private pension contributions.
I say it is about the currency, not in essence, in terms of confidence in the currency. Paul Gamble, who led the Fitch Company of Emerging Europe, told Reuters about the new plan to protect local currency savings against major market falls.
"Clearly, there's a new potential liability for the sovereign balance sheet," she said. "But if this approach works... there's no liability."
He pointed out that Turkey has much stronger finances than other big BB- rated emerging market heavyweights such as Brazil and South Africa. Its debt-to-GDP ratio is expected to end the year at 47%. The average BB- countries are 57,7, South Africa's 71% and Brazil's 81%.
Their debt-to-fiscal revenue ratio is much stronger than the amount that it has borrowed from the tax dollars that the government brings in each year, which is also much stronger at 144,5% (also 225%).
"We really need to take care of the new interest rate tools," Gamble said.
"There's some fiscal space for this," he explained. "But in the long run up to the election (expected in 2023), the public's usage, this would have been interesting in regard to a scenario where the morality of the monetary policy is eroded."