The trajectory of Turkey's international reserves and macroeconomic policy settings will be key in assessing any sovereign credit implications of the recent political events in the country, Fitch Ratings said on April 4.

The jailing of Istanbul mayor Ekrem Imamoglu has prompted large protests across various cities. This, in turn, has led to arrests of demonstrators by police, the rating agency noted.

Imamoglu is recognised by Fitch as the opposition’s main political figure.

Decline in reserves eased from March 25

Imamoglu’s arrest on March 19 led to financial market volatility, including lira depreciation pressures, and higher government bond yields and credit default swap (CDS) spreads.

The central bank’s net foreign asset position, which is published daily, shows that the decline in reserves continued until March 25, but eased thereafter.

Turkey’s policymakers have responded to the turbulence by emphasising their commitment to a policy mix characterised by a tight monetary stance and expected improvements in the consistency of income and fiscal policies.

President Recep Tayyip Erdogan has also publicly reiterated his support for the existing economic programme.

The central bank raised the ceiling of its interest rate corridor (overnight lending rate) to 46% at an interim meeting on March 20, while keeping the policy rate at 42.5%.

It also extended the maturity of its lira deposit auctions and issued short-term bills to absorb lira liquidity, while providing FX forwards settled in lira.

From 2018, Turkey suffered a series of episodes of financial stress that led to sharp lira depreciation, the erosion of international reserves, increased dollarisation and higher inflation.

Able to manage current volatility

Fitch said it believed that Turkey has the capacity to manage the current level of volatility given the stated commitment to the current policy mix.

It is, meanwhile, unclear how and when the current political uncertainty will be resolved.

Prolonged or increased uncertainty could weaken investor confidence, leading to periodic market volatility and sustained pressures on the lira.

Fitch had alreay anticipated that Turkey's de-dollarisation would slow in 2025. Further lira weakness would present risks to its forecast that official inflation will fall to 25% by end-2025 from 44% last year.

Turkey currently has a BB-/Stable rating (at three notches below investment grade) from Fitch Ratings, a B1/Positive (at four notches below investment grade) from Moody’s Investors Service and a BB-/Stable (at three notches below investment grade) from S&P Global Ratings.

“Finance minister Mehmet Simsek said in a tweet that the markets were under control,” bne IntelliNews reported on March 19.

“Someone who does not have $100bn worth of Turkish lira to sell against USD would fall short of wounding Turkey’s central bank,” this publication noted on March 20.

“A huge slap that would change the course of events is not expected from the market side,” this media outlet reiterated on March 23 and March 26.