Turkey will draw lessons from its credit downgrade to “junk” by Moody’s but is already tackling some of the challenges highlighted by the agency, including structural reform and improving the quality of its institutions, Finance Minister Naci Agbal told Reuters.
In his first interview since Moody’s cut Turkey’s sovereign debt to non-investment grade late on Friday, Agbal acknowledged that a failed coup in July had taken a toll and said Turkey’s economic growth was likely to be below 4% this year, missing the government’s 4.5% target.
But he forecast that the $720bn economy would pick up again in 2017 and took a sanguine view of the rating agency’s downgrade, saying the issues it raised were already on the government’s agenda.
“The need for structural reform, an increase in potential growth, and an improvement in institutional quality and our competitive position... are all true,” Agbal said in an interview in his office in Ankara. “We, as the government, are aware of this... The points raised by Moody’s are important to us, too, and we won’t lose time in taking measures to tackle these issues,” the former career bureaucrat, who spent six years as finance ministry undersecretary before entering politics last year, told Reuters.
A series of suicide bombings blamed on Islamic State and Kurdish militants had hit Turkey’s tourism industry and knocked domestic confidence even before the coup attempt, in which rogue soldiers commandeered tanks and fighter jets, bombing parliament and killing more than 240 people.
About 100,000 people have been sacked or suspended from the civil service, military and police in purges.
Moody’s cited worries about the rule of law, as well as risks from a slowing economy, as reasons for its downgrade.
But the government says such fears are unfounded and that measures to root out the followers of US-based cleric Fethullah Gulen, whom it blames for orchestrating the coup, will restore order and strengthen, not weaken, Turkish democracy.
“Turkey’s long-term growth can only be achieved through an emphasis on structural reform. And at the start of that are democracy, democratic reforms, and the strengthening of the rule of law,” Agbal said.
Gulen denies the government’s charges.
Turkey’s annual economic growth dipped to 3.1% in the second quarter from 4.7% in the first and is expected to slow further due partly to the fallout from the coup attempt.
Agbal said the 4.5% growth target set for 2016 in the government’s medium-term economic programme, its rolling three-year policy plan, no longer seemed attainable and a new programme would be announced in early October.
“Our revised expectation appears to be below 4%. We will announce a realistic path for both 2016 and 2017,” he said, adding that growth would be stronger next year than this.
Turkey depends on investment to fund its current account deficit – one of the biggest in the G20 – and service its foreign debt, requiring more than $200bn a year.
JP Morgan warned in July that a downgrade to junk could prompt the sale of $10bn in Turkey’s sovereign and corporate debt.
The market fall-out was, in the event, relatively short-lived.
By late on Monday, the first trading day after the downgrade, the lira had recovered much of its losses and investors paid more than expected in three bond auctions, showing strong demand for the very debt Moody’s now classifies as sub-investment grade.
“There may be some increases in banks’ foreign borrowing costs. But the increase will be limited to 25-50 basis points, which is not very significant,” said Hakan Binbasgil, the chief executive of Akbank, one of Turkey’s biggest lenders. “The banking sector will not have a major problem with foreign borrowing,” he told reporters yesterday.
Agbal vowed Turkey would focus on boosting growth, fighting inflation and tackling the current account deficit in the next three years and would take decisive steps against high food prices, one of its most stubborn economic problems.
He also said a privatisation programme would be widened and accelerated, with the proceeds – as well as the sale of equity stakes in public infrastructure projects – used partly to finance a planned sovereign wealth fund.
Some investors have questioned how such a plan can work.
Most of the biggest sovereign wealth funds around the world are built on energy earnings, but unlike the likes of Norway and Gulf countries, Turkey imports almost all of its energy needs.
Agbal said he wanted to finalise the privatisation of Turkey’s national lottery by the end of the year, after two failed attempts last year.