International credit rating agency Fitch said Friday that if political uncertainty lasts for long, there will be tension over economic policies, which will create risks for Turkish banks. Fitch released a report about the banking sector that said, "Slower economic growth, [Turkish] lira depreciation, higher interest rates and weaker investor sentiment towards Turkey could all weigh on banks' credit profiles."
According to the scenario based on Fitch's report, while the deterioration in the operating environment will be moderate, banks have capital and liquidity buffers to absorb mild shocks. Fitch noted that although the banking sector's core and total capital ratios were a sound 12.9 percent and 15.1 percent, respectively, by the end of April, their ratios might have fallen since then due to the depreciation of the Turkish lira against the dollar.
Fitch also emphasized that the ruling Justice and Development Party (AK Party) lost its parliamentary majority for the first time in 13 years, resulting in important uncertainty on the composition of the new government and near-term economic policies.
Fitch also released a statement on Monday concerning the parliamentary election results that warned political uncertainty may create tension for the country's economic policy. "The inconclusive result of Turkey's parliamentary election increases near-term political uncertainty and tensions may emerge regarding economic policy … [and] could increase risk to the sovereign credit profile, depending on how policymaking [sic] is affected," the agency said.
The statement also stressed that if the political parties do not form a coalition government within 45 days, political uncertainty could drag on in the form of an early election being called. "The possibility of another election and heightened market pressure on the exchange rate may put the central bank to the test, aggravate tensions and increase the risk of erratic policymaking [sic] or the pressure for looser fiscal policy, ultimately leading to widening budget deficits," the statement said.
The agency forecasted that a fall in the current account deficit to 4.6 percent this year, from 7.9 percent in 2013 – partly due to lower oil prices – and slower credit growth could occur in the economy.
Fitch's latest credit rating on the economy was 'BBB-'/Stable, according to a statement released on March 20.
The AK Party won its fourth consecutive general election Sunday but was not able to gain the majority needed to form a government. The party, which came to power in 2002 before winning the parliamentary elections in 2007 and 2011, secured 40.81 percent of the vote with 99.95 percent of ballots counted, giving the party 258 seats in the Grand National Assembly – 18 short of a simple majority.
The pro-Kurdish Peoples' Democratic Party (HDP) passed the 10 percent threshold with 13 percent of the vote to take 79 seats. This is the first time it will enter Parliament as a party. The second-place Republican People's Party (CHP) secured 25.05 percent of the vote to take 132 seats, while the Nationalist Movement Party (MHP) gained 16.36 percent to gain 81 seats.
World Bank: Political uncertainty weighs on Turkish economy
Political uncertainty currently weighs on the economy, but a new government could resolve policy issues and take the country forward, World Bank Chief Economist Franziska Ohnsorge told Anadolu Agency (AA) on Thursday.
The bank forecasts 3 percent growth for Turkey in 2015. But uncertainties after the elections could hurt growth if there is a prolonged period of political instability, Ohnsorge said. "We have to see what the future actually holds," she warned. "Our growth forecast is based on a number of potentially improving factors. We expect a much more benign external environment as the euro area is clearly picking up. Financing costs [for external debt] are still low. There are potential downside risks [a possible rate hike by the U.S. Federal Reserve (Fed) or rising capital outflow from emerging markets], but they may not materialize next year. On top of that, uncertainty ahead of the elections has now been relieved, so confidence will pick up strongly in the rest of this year and next year," she said.
"In run up to the elections, we have already seen that these political uncertainties weighed on investment. Going forward, we hope that election will resolve some of uncertainties and that strong policies will support improvement in growth to 3 percent this year and 3.9 percent in 2016," she added.
Ohnsorge evoked the danger of an increase in interest rates in the U.S. She highlighted that her institution also asked the Fed to postpone an interest rate hike, as the managing director of the International Monetary Fund (IMF), Christine Lagarde, also recently did. She warned that a rate may adversely affect the U.S. economy and also it would be especially negative for emerging economies.