According to a new report by global credit rating agency Fitch, the Turkish lira might plunge to 5.5 to the US dollar at end-2018 and 6 at end-2019 if quantitative tightening (QT) in the US occurs faster than they expect.
“Our QT stress scenario highlights issuer and sector sensitivities to a weaker lira, higher borrowing costs, and slower economic growth than in our baseline expectations,” Fitch said in a press statement on Wednesday.
“More pronounced US wage growth causes the Fed to raise rates to 4.5% and US bond yields rise to 5% by end-2019, and the lira would fall sharply to TRY5.5/USD at end-2018 and TRY6/USD at end-2019, although weaker domestic demand means some of this will be absorbed in profit margins, with inflation staying in double digits until end-2020.”
The Fitch report also states that the main threat to Turkish corporate credit quality stems from “foreign-currency borrowing that is not effectively hedged or matched by foreign-currency revenues.”
Fitch downgraded Turkey’s sovereign rating to ‘BB’/Negative on July 13 as downside risks to macroeconomic stability have intensified.
Turkey’s central bank left its policy rate unchanged on Tuesday, bucking market expectations of a hike and sending the lira down sharply in the bank’s first policy decision since President Recep Tayyip Erdoğan was re-elected with new executive powers, Reuters reported.