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A slowdown in Turkey's net capital inflows is likely to temper economic growth, but should not trigger a crisis because of the country's strong fundamentals, Fitch Ratings says. Nevertheless, dependence on net capital inflows is one of the key risks to the Turkish economy, and a prolonged funding shortfall would create the risk of a hard economic landing.
In the short term, the combination of the wide current account deficit (CAD), high inflation and weak international liquidity limit Turkey's room for manoeuvre, and we believe it may have to adjust its growth expectations in line with a lower and more easily funded CAD.
Despite this risk to growth, we believe the country's strong public finances will help to protect it from a balance of payments crisis. Turkey's public-debt ratio is moderate at 38% of GDP, while its budget deficit is low, and it has successfully lengthened its average debt maturity. Additional buffers include a strong banking system, modest household debt, and a dynamic corporate sector accustomed to adjusting to shocks.
There are also structural benefits to the Turkish market that we believe will keep investors engaged and reduce the risk of a sharper decline in net capital inflows. These include favourable demographics that point to strong medium-term growth potential, deep local capital markets with a good debt service record, and a favourable business climate with well-proven export market flexibility.
Net capital inflows are essential for economic growth in Turkey, where a CAD of 6%-7% of GDP mirrors a comparable imbalance between savings and investment. The current account deficit has widened again in 2013 after improving last year, while capital inflows have fallen abruptly since May, and net portfolio flows have turned mildly negative. Banks and corporates, however, have encountered little difficulty rolling over existing exposures. Nonetheless, future funding is likely to prove more expensive.
Turkey has a Long-Term IDR of 'BBB-' with a Stable Outlook. FItch
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