- In our view, less-buoyant external demand and worsening terms of trade could inhibit Turkey's economic rebalancing.
- We are therefore revising our outlook on Turkey's long-term foreign and local currency sovereign credit ratings to stable from positive, reflecting our view that the ratings on Turkey are likely to stay at the current level during the next 12 months.
- We are affirming our long- and short-term foreign currency sovereign credit ratings on Turkey at 'BB/B' and our long- and short-term local currency ratings at 'BBB-/A-3'.
On May 1, 2012, Standard & Poor's Ratings Services revised the outlook on Turkey's long-term foreign and local currency sovereign credit ratings to stable, from positive. At the same time, we affirmed our 'BB/B' foreign currency and 'BBB-/A-3' local currency long- and short-term sovereign credit ratings on Turkey. We also affirmed the Turkey long- and short-term national scale ratings at 'trAA+/trA-1'. The '3' recovery rating and 'BBB–' transfer and convertibility (T&C) assessment remain unchanged. (Watch the related CreditMatters TV segment titled "What's Behind Standard & Poor's Rating Action On The Republic Of Turkey?," dated May 1, 2012.)
Less-buoyant external demand and worsening terms of trade (the price of exports compared to imports) have, in our view, made economic rebalancing more difficult, and have increased the risks to Turkey's creditworthiness given its high external debt and the state budget's reliance on indirect tax revenues. We have revised the outlook on Turkey's long-term sovereign credit ratings to stable from positive, reflecting our view that the ratings are likely to remain at the current level during the next 12 months. Under our sovereign ratings criteria (see "Related Criteria And Research" below), the key constraints on Turkey's ratings are:
- Its external vulnerability as measured by high net external debt and gross external financing needs relative to its capacity to generate foreign currency (measured by current account receipts [CARs]).
- Modest income levels. We estimate Turkey's GDP per capita at $9,840 at end-2011, which is below the majority of its trading partners but compares well with similarly rated sovereigns. This reflects modest levels of absolute productivity, as well as low labor participation rates, especially among women.
- Risks related to the 2010-2011 credit boom. Turkey's real GDP growth of more than 8% annually over the past two years was mostly driven by rapid domestic credit expansion, financed mainly by short-term external funding to banks. Domestic demand, particularly via import-intensive private consumption and investment in nontradable sectors, mainly contributed to this rapid GDP growth.
As a result of the above factors, Turkey's current account deficit (CAD) exceeded 40% of CARs in 2011 (about 10% of GDP) and the financial sector's net external debt rose to 40% of CARs at end-2011, versus 7% at end-2009. We estimate that Turkey's gross external financing needs (current account payment plus short-term external debt by residual maturity) will reach 142% of CARs plus usable reserves in 2012, one of the highest ratios for a rated sovereign. This heavy reliance on external savings exposes Turkey to shocks, either domestic--for example if recent high domestic credit growth were to result in future bad loans--or external, say if rising risk aversion were to deter foreign investors and banks and result in a net outflow of foreign capital. Such external shocks could lead to a rapid depreciation of the Turkish lira, with a significant pass-through to inflation. In turn this could increase domestic interest rates and have a potential negative secondary effect on government borrowing costs. In addition, we note that Turkish banks obtained about $14.8 billion (8% of CARs) of foreign currency funding through repurchase agreements of local currency securities with foreign banks at end-2011; this exposes banks to margin calls should bond prices fall or the Turkish lira depreciate. Our ratings on Turkey are supported by our view of its generally effective policymaking and institutions, its moderate and declining public debt burden, and its monetary policy flexibility. In our view, a floating exchange rate regime can work as a channel of nominal adjustment for economies like Turkey that are exposed to potentially volatile capital inflows. As the Turkish lira has weakened since the second half of 2011, we expect domestic demand for imports to moderate and Turkish exports to become more competitive. However, we believe the competitiveness gain from weaker exchange rates will probably be partly offset by wage inflation through indexation. During fourth-quarter 2011, credit growth decelerated as the cost of external funding increased. The Banking Regulation and Supervisory Agency of Turkey has also implemented macroprudential measures that have helped manage credit growth. In our view, however, Turkey's central bank's monetary policy--with stable policy repo rates but frequently adjusted and diverging overnight rates--has been less effective in influencing monetary conditions or narrowing Turkey's sizable external deficit. This has been partly due to the highly accommodative monetary policies of global central banks in advanced economies. We believe that the government will aim to stabilize net general government debt to GDP at around 35% by 2015, despite our expectation that GDP will slow to 2% in 2012 as credit growth decelerates. We estimate that the general government primary surplus will likely have reached 1% of GDP in 2011 before deteriorating mildly over the ratings horizon (2012-2015) due to our forecast of economic slowdown. In our opinion, much of 2011's expected fiscal outperformance is due to temporary factors, including what we view to have been an unsustainable, credit-driven, year-on-year expansion of nominal GDP by some 15%, as well as the government's success in raising funds by tax amnesties. While Turkey's large and resilient economy benefits from a young and rapidly growing population, the social security deficit continues to be the major driver of headline general government deficit, highlighting the need for social security reform.
The stable outlook reflects our view that the key risks to the Turkish economy will likely remain in balance in the next 12 months. If external demand is stronger than we have assumed in our base case scenario, and the Turkish economy continues to shift toward net-export-driven growth, its external imbalances could unwind without the fiscal accounts significantly weakening or banks destabilizing. As of April 2012, the banking sector continued to report a loan-to-deposit ratio of just under 100%, compared with less than 80% at end-2009. As Turkey moves toward more-balanced and sustainable growth, its sovereign credit standing could improve. We could consider a positive rating action if we see that structural reforms to the social security and energy sectors, and to education and labor policy, have boosted foreign direct investment and GDP growth. Creditworthiness could also improve, in our view, were the Turkish government to rationalize public spending and reduce budgetary vulnerabilities in the medium-to-long term. On the other hand, if external demand is weaker than our baseline assumption, or Turkey's oil import price rises further and external financing costs increase, economic adjustment would be seen in a sharper contraction in domestic demand. In our view, this could adversely affect Turkey's fiscal account as well as Turkish banks' credit quality, thus potentially weakening Turkey's creditworthiness and placing pressure on the ratings. Moreover, a continued abundant supply of liquidity, globally, could exacerbate imbalances in Turkey. In our view, a delayed correction would increase the risk of reduced access to external funding and could also weaken the government's fiscal accounts beyond our current expectations, which could place downward pressure on the ratings.
Related Criteria And Research
- Special Report: Turkey: On The Path To Becoming An Emerged Market, May 7, 2012
- Sovereign Government Rating Methodology And Assumptions, June 30, 2011
- Criteria For Determining Transfer And Convertibility Assessments, May 19, 2009
- Introduction Of Sovereign Recovery Ratings, June 14, 2007
Ratings Affirmed; CreditWatch/Outlook Action To From Turkey (Republic of) Sovereign Credit Rating Foreign Currency BB/Stable/B BB/Positive/B National Scale Rating trAA+/--/trA-1 Transfer & Convertibility Assessment BBB- Senior Unsecured BB Recovery Rating 3 Turkey (Republic of) Sovereign Credit Rating Local Currency BBB-/Stable/A-3 BBB-/Positive/A-3 Senior Unsecured BBB-
Complete ratings information is available to subscribers of RatingsDirect on the Global Credit Portal at www.globalcreditportal.com. All ratings affected by this rating action can be found on Standard & Poor's public Web site at www.standardandpoors.com. Use the Ratings search box located in the left column. Alternatively, call one of the following Standard & Poor's numbers: Client Support Europe (44) 20-7176-7176; London Press Office (44) 20-7176-3605; Paris (33) 1-4420-6708; Frankfurt (49) 69-33-999-225; Stockholm (46) 8-440-5914; or Moscow 7 (495) 783-4009.
|Primary Credit Analyst:||Eileen X Zhang, CFA, London (44) 20-7176-7105;|
|Secondary Contact:||Frank Gill, London (44) 20-7176-7129;|
|Additional Contact:||Sovereign Ratings;|
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