OREANDA-NEWS. The Turkish economy is growing faster than its ratings peers and some external indicators are still improving, but a hiatus in structural reforms and a weakening in some policy settings means the durability of these trends is uncertain, Fitch Ratings says.

A pro-growth bias is apparent in monetary policy. The Central Bank of the Republic of Turkey (CBRT) on Tuesday cut the top rate of the interest-rate corridor for the fourth time this year. Cumulative cuts in 2016 total 175 bp. Although billed as part of a planned simplification of monetary policy under new governor Murat Cetinkaya, the narrowing of the interest-rate corridor has occurred entirely at the upper end. With the interest-rate floor unchanged, the effective funding rate is falling, despite stubbornly high core inflation.

Lower rates will further support consumption, which is driving GDP growth. Consumption has also been supported by a higher minimum wage as well as the influx of migrants. GDP increased by 4.8% in 1Q16 from a year earlier at constant prices, data from the Turkish Statistical Institute showed earlier this month. Household consumption increased by 6.9%, the fastest rate in over four years.

Consumption-driven growth draws in imports, but the adverse effect on the current account is more than offset by lower oil prices. The CBRT reported this month that the current account deficit fell nearly USD1bn yoy in April. This was the ninth consecutive monthly fall, and reduced the rolling 12-month deficit to a near six-year low, despite a drop in tourist arrivals, with Bloomberg reporting a 28% yoy fall in April on security concerns and Russian sanctions.

Despite the cyclical narrowing of the current account deficit, the external financing requirement remains large. The potential risks from economic overheating or changes in international investor sentiment are long-standing credit weaknesses, and the prospects for economic and external rebalancing are an important part of our sovereign ratings assessment.

The Turkish government has outlined a policy programme to tackle structural weaknesses. But renewed political commitment to reforms that would sustainably improve the pace and composition of growth and reduce vulnerability to external shocks (to which Turkey has been resilient) has yet to be demonstrated.

Prime Minister Binali Yildirim, who succeeded Ahmet Davutoglu in May, has included reform advocates in his cabinet. But he has also restated plans to amend the constitution to give the presidency more powers. This is likely to maintain the political uncertainty that saw Davutoglu replaced, and which increases risks to policy predictability. We think that the CBRT will remain under political pressure to continue easing.

Implementation of structural reform would be credit positive, as would a more stable and predictable domestic political and security environment. A deterioration in fiscal discipline or a materialisation of external stresses would put pressure on Turkey's 'BBB-'/Stable sovereign rating.