Turkey's recent fiscal tightening illustrates a commitment to fiscal discipline following a period of counter-cyclical stimulus, according to Fitch Ratings on Friday.
Thursday's interest rate hike shows that Turkey's Central Bank (CBRT) will act when facing tougher external conditions, Fitch said in a press release following the previous day's action by the bank.
In Fitch's view, the complex monetary policy framework undermined monetary policy transmission mechanisms. "Thursday's rate rise followed several administrative measures that could have a long-term impact on FX demand or slow credit growth, but give the impression the CBRT prefers to avoid rate rises," it said.
The ratings agency added: "Growth in 2017 looks set to outpace our projection following a very strong 3Q outturn published on Monday, driven by large base effects. However, we expect growth to slow in 2018, as fiscal stimulus is rolled back, and we lowered our 2018 forecast to 3.9 percent."
Turkey became the fastest-growing economy among G20 countries with its unexpectedly high 11.1 percent growth in the third quarter of 2017.
"Planned fiscal tightening in 2018, ahead of elections in 2019, suggests the authorities are keen to maintain fiscal discipline after this year's fiscal loosening," Fitch said, adding Turkey's public debt metrics were superior to both 'BB' and 'BBB' category medians.
Saying that the tightening was projected to narrow the budget deficit in 2018, Fitch said: "We view recent policy actions as broadly consistent with our assumptions on economic policy management. These underscore our long-held view that external finances are the key weakness for Turkey's sovereign credit profile and fiscals the key strength."
