Turkey vows structural measures after Moody’s downgrade

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, said Finance Minister Naci Agbal.
In his first interview since Moody’s cut Turkey’s sovereign debt to non-investment grade, Agbal acknowledged that a failed coup in July had taken a toll and said Turkey’s economic growth was likely to be below 4 percent this year, missing the government’s 4.5 percent target.
But he forecast that the $720 billion 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,” said the former career bureaucrat, who spent six years as finance ministry undersecretary before entering politics last year.
A series of suicide bombings 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.
The aftermath has done little to reassure. About 100,000 people have been sacked or suspended from the civil service, military and police in purges, prompting fears among Western allies that President Tayyip Erdogan is using the events as a pretext to stifle dissent, weakening Turkey’s institutions.
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.

LIMITED FALL-OUT

Turkey’s annual economic growth dipped to 3.1 percent in the second quarter from 4.7 percent in the first and is expected to slow further due partly to the fallout from the coup attempt.
Agbal said the 4.5 percent growth target set for 2016 in the government’s medium-term economic program, its rolling three-year policy plan, no longer seemed attainable and a new program would be announced in early October.
“Our revised expectation appears to be below 4 percent. 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 $200 billion a year. JP Morgan warned in July that a downgrade to junk could prompt the sale of $10 billion 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 on Wednesday.
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 privatization program 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 finalize the privatization of Turkey’s national lottery by the end of the year, after two failed attempts last year. The sale had been expected to bring in around $2.76 billion for the government.
“We will take any structural measures that we believe the economy needs,” he said. 
“We are already taking these steps. As long as we take these steps, ratings agencies and investors will understand what we are trying to do.”

Source: Arab News