Overview

  • Following the attempted coup in the Republic of Turkey on July 15, we believe the polarization of Turkey's political landscape has further eroded its institutional checks and balances.
  • In addition, we expect a period of heightened unpredictability that could constrain capital inflows into Turkey's externally leveraged economy.
  • As a result, we are lowering our foreign and local currency sovereign credit ratings on Turkey to 'BB/B' and 'BB+/B', respectively, from 'BB+/B' and 'BBB-/A-3'.
  • The negative outlook reflects our view that Turkey's economic, fiscal, and debt metrics could deteriorate beyond what we expect, if political uncertainty contributed to further weakening in the investment environment, potentially intensifying balance-of-payment pressures.

Rating Action

On July 20, 2016, S&P Global Ratings lowered its unsolicited foreign currency 
long- and short-term sovereign credit ratings on the Republic of Turkey to 
'BB/B' from 'BB+/B'. At the same time, we lowered our unsolicited local 
currency long- and short-term sovereign credit ratings on Turkey to 'BB+/B' 
from 'BBB-/A-3'. The outlook is negative.

We also revised the transfer and convertibility (T&C) assessment on Turkey to 
'BBB-' from 'BBB'. In addition, we lowered our unsolicited long-term Turkey 
national scale rating to 'trAA+' from 'trAAA' and affirmed the 'trA-1' 
short-term rating.

As a "sovereign rating" (as defined in EU CRA Regulation 1060/2009 "EU CRA 
Regulation"), the ratings on the Republic of Turkey are subject to certain 
publication restrictions set out in Art 8a of the EU CRA Regulation, including
publication in accordance with a pre-established calendar (see "Calendar Of 
2016 EMEA Sovereign, Regional, And Local Government Rating Publication Dates,"
published Dec. 22, 2015, on RatingsDirect). Under the EU CRA Regulation, 
deviations from the announced calendar are allowed only in limited 
circumstances and must be accompanied by a detailed explanation of the reasons
for the deviation.

In this case, the reason for the deviation is our view that following the 
attempted coup on July 15, 2016, Turkey's institutional effectiveness has been
further eroded, raising risks to its externally leveraged economy. We believe 
these events will make rolling over Turkey's substantial short-term external 
debt more challenging.

The next rating publication on Turkey is scheduled for Nov. 4, 2016, according
to our calendar.

Rationale

The downgrade reflects our view that following the attempted coup on July 15, 
Turkey's political landscape has fragmented further. We believe this will 
undermine Turkey's investment environment, growth, and capital inflows into 
its externally leveraged economy. In the aftermath of the failed coup, we 
believe that the risks to Turkey's ability to roll over its external debt have
increased. We estimate that it has to roll over nearly 42% of its total 
external debt--amounting to over US$170 billion (5x usable reserves; 24% of 
estimated 2016 GDP)--over the next 12 months. In addition, we expect that 
given the political uncertainty, Turkey's policymakers will likely stray from 
their commitment to enact reforms intended to wean the economy away from its 
dependence on foreign financing.

Since the attempted coup, we understand that, so far, an estimated 45,000, 
largely government officials, have either been suspended or removed from their
posts, with the education and judiciary sectors most affected. A further 
14,000 police officers and soldiers have either been suspended or detained. We
had already expected heightened political uncertainty in 2015--due to 
escalating domestic violence following the ending of the peace process with 
Kurdish militants, two general elections, and instability along Turkey's 
southeastern border--to spill over into 2016 (see "Republic of Turkey Outlook 
Revised To Stable; 'BB+/B' Ratings Affirmed," published May 6, 2016). However,
the attempted coup and our expectation about the associated fallout on the 
real economy, through weakening capital inflows, is beyond what we factored 
into our previous base-case scenario. Turkey's net foreign exchange 
reserves--at an estimated $32 billion--provide coverage for only about two 
months of current account payments, suggesting limited buffers to offset 
external pressures.

Mitigating its external vulnerabilities to some degree, Turkey has deep 
local-currency capital markets that have facilitated its access to and cost of
financing. Two-thirds of government debt is funded in local currency and at 
fixed rates. Furthermore, we view the treasury's policy of meeting net 
public-sector financing needs by issuing in local currency at longer 
maturities as a positive rating factor.

Outlook

The negative outlook reflects our view that Turkey's economic, fiscal, and 
debt metrics could deteriorate beyondwhat we expect, if political uncertainty 
contributed to further weakening in the investment environment, potentially 
intensifying balance-of-payment pressures. We could also lower the ratings if 
we assessed Turkey's monetary policy credibility as deteriorating due to 
government intervention.

We could revise our outlook on Turkey to stable if the government's fiscal 
deficits remained modest and the independence of key institutions was not 
eroded.

Key Statistics

Table 1

Republic of Turkey Selected Indicators
2010201120122013201420152016201720182019
ECONOMIC INDICATORS (%)
Nominal GDP (bil. TRY)1,0991,2981,4171,5671,7481,9542,1622,3912,6462,928
Nominal GDP (bil. $)731775789823799718732771802837
GDP per capita (000s $)9.910.410.410.710.39.19.19.49.69.8
Real GDP growth9.28.82.14.23.04.03.43.43.43.4
Real GDP per capita growth7.47.30.92.81.72.61.41.31.41.4
Real investment growth30.518.0(2.7)4.4(1.3)3.61.53.53.83.8
Investment/GDP19.523.620.120.620.018.519.619.319.519.5
Savings/GDP13.414.014.112.914.614.015.114.714.715.4
Exports/GDP21.224.026.325.627.928.027.226.525.725.7
Real exports growth3.47.916.3(0.2)7.4(0.8)0.73.24.24.2
Unemployment rate11.19.18.49.09.910.310.110.010.010.0
EXTERNAL INDICATORS (%)
Current account balance/GDP(6.1)(9.6)(6.1)(7.7)(5.5)(4.5)(4.5)(4.6)(4.8)(4.1)
Current account balance/CARs(27.2)(39.2)(22.6)(29.5)(19.2)(15.8)(16.5)(17.2)(18.2)(15.7)
Trade balance/GDP(7.7)(11.5)(8.3)(9.7)(8.0)(6.7)(6.8)(6.5)(6.5)(5.8)
Net FDI/GDP1.01.81.21.10.71.60.90.90.90.9
Net portfolio equity inflow/GDP0.5(0.1)0.80.10.3(0.3)0.40.50.50.5
Gross external financing needs/CARs plus usable reserves131.6146.3152.3166.5171.3180.3176.6175.8180.7180.8
Narrow net external debt/CARs110.5105.6108.5121.1121.7128.3138.0143.4152.0154.1
Net external liabilities/CARs220.5166.0199.6183.2194.1180.0197.5208.5223.8230.2
Short-term external debt by remaining maturity/CARs63.572.169.678.890.5103.587.185.887.586.4
Reserves/CAPs (months)4.23.82.62.32.32.21.61.61.41.2
FISCAL INDICATORS (%, General government)
Balance/GDP(3.5)(1.2)(2.1)(1.3)(1.2)(1.2)(1.7)(2.5)(2.6)(2.7)
Change in debt/GDP2.43.30.33.51.12.91.72.52.62.7
Primary balance/GDP0.21.50.71.41.01.00.4(0.5)(0.5)(0.6)
Revenue/GDP37.437.038.140.239.740.340.040.040.040.0
Expenditures/GDP41.038.240.241.540.941.441.742.542.642.7
Interest /revenues9.97.37.36.75.55.55.25.15.25.2
Debt/GDP42.339.136.236.133.532.931.530.930.630.3
Debt/Revenue112.9105.794.989.984.581.778.677.476.475.8
Net debt/GDP38.435.232.231.829.528.327.327.227.227.2
Liquid assets/GDP3.93.94.04.44.04.64.13.83.43.1
MONETARY INDICATORS (%)
CPI growth8.66.58.97.58.97.77.57.67.27.2
GDP deflator growth5.78.66.96.28.37.57.07.07.07.0
Exchange rate, year-end (TRY/$)1.51.91.82.12.32.93.03.23.43.6
Banks' claims on resident non-gov't sector growth39.631.718.933.718.620.212.011.011.010.0
Banks' claims on resident non-gov't sector/GDP46.251.656.267.972.277.678.578.879.178.6
Foreign currency share of claims by banks on residentsN/AN/AN/AN/AN/AN/AN/AN/AN/AN/A
Foreign currency share of residents' bank deposits27.129.527.631.031.937.635.035.035.035.0
Real effective exchange rate growth10.1(18.4)8.00.1(5.1)3.0N/AN/AN/AN/A
Savings is defined as investment plus the current account surplus (deficit). Investment is defined as expenditure on capital goods, including plant, equipment, and housing, plus the change in inventories. Banks are other depository corporations other than the central bank, whose liabilities are included in the national definition of broad money. Gross external financing needs are defined as current account payments plus short-term external debt at the end of the prior year plus nonresident deposits at the end of the prior year plus long-term external debt maturing within the year. Narrow net external debt is defined as the stock of foreign and local currency public- and private- sector borrowings from nonresidents minus official reserves minus public-sector liquid assets held by nonresidents minus financial-sector loans to, deposits with, or investments in nonresident entities. A negative number indicates net external lending. TRY--Turkish lira. CARs--Current account receipts. FDI--Foreign direct investment. CAPs--Current account payments. N/A--Not applicable. The data and ratios above result from S&P Global Ratings' own calculations, drawing on national as well as international sources, reflecting S&P Global Ratings' independent view on the timeliness, coverage, accuracy, credibility, and usability of available information.

Ratings Score Snapshot

Table 2

Republic of Turkey Ratings Score Snapshot
Key rating factors 
Institutional assessmentWeakness
Economic assessmentNeutral
External assessmentWeakness
Fiscal assessment: flexibility and performanceStrength
Fiscal assessment: debt burdenStrength
Monetary assessmentNeutral
S&P Global Ratings' analysis of sovereign creditworthiness rests on its assessment and scoring of five key rating factors: (i) institutional assessment; (ii) economic assessment; (iii) external assessment; (iv) the average of fiscal flexibility and performance, and debt burden; and (v) monetary assessment. Each of the factors is assessed on a continuum spanning from 1 (strongest) to 6 (weakest). Section V.B of S&P Global Ratings' "Sovereign Rating Methodology," published on Dec. 23, 2014, summarizes how the various factors are combined to derive the sovereign foreign currency rating, while section V.C details how the scores are derived. The ratings score snapshot summarizes whether we consider that the individual rating factors listed in our methodology constitute a strength or a weakness to the sovereign credit profile, or whether we consider them to be neutral. The concepts of "strength", "neutral", or "weakness" are absolute, rather than in relation to sovereigns in a given rating category. Therefore, highly rated sovereigns will typically display more strengths, and lower rated sovereigns more weaknesses. In accordance with S&P Global Ratings' sovereign ratings methodology, a change in assessment of the aforementioned factors does not in all cases lead to a change in the rating, nor is a change in the rating necessarily predicated on changes in one or more of the assessments.

Related Criteria And Research



Related Research

In accordance with our relevant policies and procedures, the Rating Committee 
was composed of analysts that are qualified to vote in the committee, with 
sufficient experience to convey the appropriate level of knowledge and 
understanding of the methodology applicable (see 'Related Criteria And 
Research'). At the onset of the committee, the chair confirmed that the 
information provided to the Rating Committee by the primary analyst had been 
distributed in a timely manner and was sufficient for Committee members to 
make an informed decision. After the primary analyst gave opening remarks and 
explained the recommendation, the Committee discussed key rating factors and 
critical issues in accordance with the relevant criteria. Qualitative and 
quantitative risk factors were considered and discussed, looking at 
track-record and forecasts.

The committee revised the "institutional assessment" to weakness from neutral.
All other key rating factors were unchanged.

The chair ensured every voting member was given the opportunity to articulate 
his/her opinion. The chair or designee reviewed the draft report to ensure 
consistency with the Committee decision. The views and the decision of the 
rating committee are summarized in the above rationale and outlook. The 
weighting of all rating factors is described in the methodology used in this 
rating action (see 'Related Criteria and Research').



Ratings List

                                  Rating                                      
                                  To                     From                 
Turkey (Republic of)
 Sovereign Credit Rating                                                      
  Foreign Currency|U~             BB/Negative/B          BB+/Stable/B         
  Local Currency|U~               BB+/Negative/B         BBB-/Stable/A-3      
  Turkey National Scale|U~        trAA+/--/trA-1         trAAA/--/trA-1       
 Transfer & Convertibility                                                    
  Assessment|U~                   BBB-                   BBB                  

|U~ Unsolicited ratings with no issuer participation and/or no access to 
internal documents.

This unsolicited rating(s) was initiated by a party other than the Issuer (as 
defined in S&P Global Ratings' policies). It may be based solely on publicly 
available information and may or may not involve the participation of the 
Issuer and/or access to the Issuer's internal documents. S&P Global Ratings 
has used information from sources believed to be reliable based on standards 
established in our policies and procedures, but does not guarantee the 
accuracy, adequacy, or completeness of any information used.


Certain terms used in this report, particularly certain adjectives used to 
express our view on rating relevant factors, have specific meanings ascribed 
to them in our criteria, and should therefore be read in conjunction with such
criteria. Please see Ratings Criteria at www.standardandpoors.com for further 
information. Complete ratings information is available to subscribers of 
RatingsDirect at www.globalcreditportal.com and at spcapitaliq.com. All 
ratings affected by this rating action can be found on S&P Global Ratings' 
public Web site at www.standardandpoors.com. Use the Ratings search box 
located in the left column. Alternatively, call one of the following S&P 
Global Ratings 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:Trevor Cullinan, Dubai (971) 4-372-7113;
trevor.cullinan@spglobal.com
Secondary Credit Analyst:Aarti Sakhuja, Madrid (34) 91-788-7207;
aarti.sakhuja@spglobal.com
Additional Contact:SovereignEurope;
SovereignEurope@standardandpoors.com

No content (including ratings, credit-related analyses and data, valuations, model, software or other application or output therefrom) or any part thereof (Content) may be modified, reverse engineered, reproduced or distributed in any form by any means, or stored in a database or retrieval system, without the prior written permission of Standard & Poor’s Financial Services LLC or its affiliates (collectively, S&P). The Content shall not be used for any unlawful or unauthorized purposes. S&P and any third-party providers, as well as their directors, officers, shareholders, employees or agents (collectively S&P Parties) do not guarantee the accuracy, completeness, timeliness or availability of the Content. S&P Parties are not responsible for any errors or omissions (negligent or otherwise), regardless of the cause, for the results obtained from the use of the Content, or for the security or maintenance of any data input by the user. The Content is provided on an “as is” basis. S&P PARTIES DISCLAIM ANY AND ALL EXPRESS OR IMPLIED WARRANTIES, INCLUDING, BUT NOT LIMITED TO, ANY WARRANTIES OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE OR USE, FREEDOM FROM BUGS, SOFTWARE ERRORS OR DEFECTS, THAT THE CONTENT’S FUNCTIONING WILL BE UNINTERRUPTED OR THAT THE CONTENT WILL OPERATE WITH ANY SOFTWARE OR HARDWARE CONFIGURATION. In no event shall S&P Parties be liable to any party for any direct, indirect, incidental, exemplary, compensatory, punitive, special or consequential damages, costs, expenses, legal fees, or losses (including, without limitation, lost income or lost profits and opportunity costs or losses caused by negligence) in connection with any use of the Content even if advised of the possibility of such damages.

Credit-related and other analyses, including ratings, and statements in the Content are statements of opinion as of the date they are expressed and not statements of fact. S&P’s opinions, analyses and rating acknowledgment decisions (described below) are not recommendations to purchase, hold, or sell any securities or to make any investment decisions, and do not address the suitability of any security. S&P assumes no obligation to update the Content following publication in any form or format. The Content should not be relied on and is not a substitute for the skill, judgment and experience of the user, its management, employees, advisors and/or clients when making investment and other business decisions. S&P does not act as a fiduciary or an investment advisor except where registered as such. While S&P has obtained information from sources it believes to be reliable, S&P does not perform an audit and undertakes no duty of due diligence or independent verification of any information it receives. Rating-related publications may be published for a variety of reasons that are not necessarily dependent on action by rating committees, including, but not limited to, the publication of a periodic update on a credit rating and related analyses.

To the extent that regulatory authorities allow a rating agency to acknowledge in one jurisdiction a rating issued in another jurisdiction for certain regulatory purposes, S&P reserves the right to assign, withdraw or suspend such acknowledgment at any time and in its sole discretion. S&P Parties disclaim any duty whatsoever arising out of the assignment, withdrawal or suspension of an acknowledgment as well as any liability for any damage alleged to have been suffered on account thereof.

S&P keeps certain activities of its business units separate from each other in order to preserve the independence and objectivity of their respective activities. As a result, certain business units of S&P may have information that is not available to other S&P business units. S&P has established policies and procedures to maintain the confidentiality of certain non-public information received in connection with each analytical process.

S&P may receive compensation for its ratings and certain analyses, normally from issuers or underwriters of securities or from obligors. S&P reserves the right to disseminate its opinions and analyses. S&P's public ratings and analyses are made available on its Web sites, www.standardandpoors.com (free of charge), and www.ratingsdirect.com and www.globalcreditportal.com (subscription), and may be distributed through other means, including via S&P publications and third-party redistributors. Additional information about our ratings fees is available at www.standardandpoors.com/usratingsfees.

Any Passwords/user IDs issued by S&P to users are single user-dedicated and may ONLY be used by the individual to whom they have been assigned. No sharing of passwords/user IDs and no simultaneous access via the same password/user ID is permitted. To reprint, translate, or use the data or information other than as provided herein, contact S&P Global Ratings, Client Services, 55 Water Street, New York, NY 10041; (1) 212-438-7280 or by e-mail to: research_request@spglobal.com.