- 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.
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.
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.
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.
|Republic of Turkey Selected Indicators|
|ECONOMIC INDICATORS (%)|
|Nominal GDP (bil. TRY)||1,099||1,298||1,417||1,567||1,748||1,954||2,162||2,391||2,646||2,928|
|Nominal GDP (bil. $)||731||775||789||823||799||718||732||771||802||837|
|GDP per capita (000s $)||9.9||10.4||10.4||10.7||10.3||9.1||9.1||9.4||9.6||9.8|
|Real GDP growth||9.2||8.8||2.1||4.2||3.0||4.0||3.4||3.4||3.4||3.4|
|Real GDP per capita growth||7.4||7.3||0.9||2.8||1.7||2.6||1.4||1.3||1.4||1.4|
|Real investment growth||30.5||18.0||(2.7)||4.4||(1.3)||3.6||1.5||3.5||3.8||3.8|
|Real exports growth||3.4||7.9||16.3||(0.2)||7.4||(0.8)||0.7||3.2||4.2||4.2|
|EXTERNAL INDICATORS (%)|
|Current account balance/GDP||(6.1)||(9.6)||(6.1)||(7.7)||(5.5)||(4.5)||(4.5)||(4.6)||(4.8)||(4.1)|
|Current account balance/CARs||(27.2)||(39.2)||(22.6)||(29.5)||(19.2)||(15.8)||(16.5)||(17.2)||(18.2)||(15.7)|
|Net portfolio equity inflow/GDP||0.5||(0.1)||0.8||0.1||0.3||(0.3)||0.4||0.5||0.5||0.5|
|Gross external financing needs/CARs plus usable reserves||131.6||146.3||152.3||166.5||171.3||180.3||176.6||175.8||180.7||180.8|
|Narrow net external debt/CARs||110.5||105.6||108.5||121.1||121.7||128.3||138.0||143.4||152.0||154.1|
|Net external liabilities/CARs||220.5||166.0||199.6||183.2||194.1||180.0||197.5||208.5||223.8||230.2|
|Short-term external debt by remaining maturity/CARs||63.5||72.1||69.6||78.8||90.5||103.5||87.1||85.8||87.5||86.4|
|FISCAL INDICATORS (%, General government)|
|Change in debt/GDP||2.4||3.3||0.3||3.5||1.1||2.9||1.7||2.5||2.6||2.7|
|MONETARY INDICATORS (%)|
|GDP deflator growth||5.7||8.6||6.9||6.2||8.3||7.5||7.0||7.0||7.0||7.0|
|Exchange rate, year-end (TRY/$)||1.5||1.9||1.8||2.1||2.3||2.9||3.0||3.2||3.4||3.6|
|Banks' claims on resident non-gov't sector growth||39.6||31.7||18.9||33.7||18.6||20.2||12.0||11.0||11.0||10.0|
|Banks' claims on resident non-gov't sector/GDP||46.2||51.6||56.2||67.9||72.2||77.6||78.5||78.8||79.1||78.6|
|Foreign currency share of claims by banks on residents||N/A||N/A||N/A||N/A||N/A||N/A||N/A||N/A||N/A||N/A|
|Foreign currency share of residents' bank deposits||27.1||29.5||27.6||31.0||31.9||37.6||35.0||35.0||35.0||35.0|
|Real effective exchange rate growth||10.1||(18.4)||8.0||0.1||(5.1)||3.0||N/A||N/A||N/A||N/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
|Republic of Turkey Ratings Score Snapshot|
|Key rating factors|
|Fiscal assessment: flexibility and performance||Strength|
|Fiscal assessment: debt burden||Strength|
|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
- General Criteria: S&P Global Ratings' National And Regional Scale Mapping Tables - June 01, 2016
- Criteria - Governments - Sovereigns: Sovereign Rating Methodology - December 23, 2014
- General Criteria: National And Regional Scale Credit Ratings - September 22, 2014
- General Criteria: Methodology For Linking Short-Term And Long-Term Ratings For Corporate, Insurance, And Sovereign Issuers - May 07, 2013
- General Criteria: Use Of CreditWatch And Outlooks - September 14, 2009
- General Criteria: Methodology: Criteria For Determining Transfer And Convertibility Assessments - May 18, 2009
- Central And Eastern Europe Rating Trends Mid-Year 2016 - July 13, 2016
- Sovereign Risk Indicators - July 06, 2016. An interactive version is also available at http://www.spratings.com/sri
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- Default, Transition, and Recovery: 2014 Annual Sovereign Default Study And Rating Transitions -May 18, 2015
- Local Currency Ratings On Turkey Lowered To 'BBB-/A-3'; Outlook Remains Negative - May 08, 2015
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').
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;|
|Secondary Credit Analyst:||Aarti Sakhuja, Madrid (34) 91-788-7207;|
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