Turkiye’s growing current account deficit (CAD) and its unconventional economic policy mix, highlighted by recent’s central bank decision to cut its policy rate, will keep the sovereign’s external finances under pressure, Fitch Ratings says. This is notwithstanding a short-term boost to international reserves from strong tourism numbers and a one-off bilateral transfer.
 
The Central Bank of the Republic of Turkiye (CBRT) on Thursday lowered its policy rate by 100bp to 13% in spite of annual inflation reaching 79.6% in July, rising international financing costs, and the lira having depreciated by 27% against the US dollar in 2022. This action underscores how extremely loose monetary policy and rapid credit growth have helped to widen the CAD, pushing up non-energy imports at the same time as high oil and gas prices increase net energy imports.
 
 The CAD widened to USD32.4 billion in 1H22 compared with a total of USD13.6 billion for 2021. The 12-month trade deficit grew to USD57 billion and could expand further given the increased likelihood of a near-complete shut-off of all Russian gas exports to the EU, hitting demand in Turkey’s largest export market and keeping energy prices high.
 
 Tourism revenues appear on track for a record year, with total travel income of USD11.9 billion in 1H22 exceeding that in 1H19 by more than 10%. International reserves appear to have been boosted by a one-off transfer to a local subsidiary of funds related to the construction of a nuclear power plant and external debt rollover remains resilient.
 
 However, we think external finances will remain under pressure while government policy is focused on maintaining high growth despite a worsening in macroeconomic stability and the external environment. This was reflected in our maintenance of a Negative Outlook when we downgraded Turkiye to ‘B’ in July.