London, 20 June 2012 -- Moody's Investors Service has today upgraded Turkey's government
bond ratings by one notch to Ba1 from Ba2, and has maintained the
positive outlook.
The key drivers for today's rating action are:
1. The significant improvement in Turkey's public finances
and the resulting increased shock-absorption capacity of the government's
balance sheet; and
2. Policy actions that have the potential to address external imbalances,
such as the large current account deficit, which is the largest
credit risk facing the country.
Moody's decision to maintain the positive outlook on Turkey's
ratings reflects the rating agency's expectation that both of the
drivers that led to today's rating upgrade will continue to improve
the country's fiscal and macroeconomic resilience. Looking
ahead, an upgrade to an investment-grade rating will probably
be dependent on Turkey becoming more resilient to balance-of-payment
shocks, given the already favourable public-finance metrics.
RATINGS RATIONALE
The first driver underlying Moody's decision to upgrade Turkey's
sovereign rating is the increased resilience of Turkey's public
finances. Although the international economic environment has become
more challenging and Turkish domestic growth is slowing down, the
country's ongoing efforts to reduce its debt burden are unlikely
to be significantly affected. Moody's notes that the relatively
minor and short-lived deterioration in Turkey's public finances
after the 2008-09 financial crisis gives some cause for optimism.
Moreover, the deficit reduction and primary surpluses that the Turkish
government has recorded over the past two years are largely due to expenditure
restraint than revenue increases, despite the booming economic growth
of the past two years. In fact, since 2009, Turkey's
general government expenditure as a percentage of GDP has fallen from
40.1% to 37.4%, whereas general government
revenues have risen from 34.2% to 36.1%.
Even in Moody's adverse scenario, which includes more pessimistic
outcomes (relative to our forecasts) for nominal GDP growth, the
primary balance and interest costs, the rating agency assumes only
a slight decline over a two-year time horizon for Turkey's
debt burden (both general government debt as a percentage of GDP and the
debt affordability ratio). In fact, Turkey's general
government debt level of 39.4% in 2011 was much lower than
the Ba1 median of 54.6% and more in line with the Baa3 median
of 38.5%.
The second driver for today's upgrade is a set of policies that
the Turkish government has been pursuing with the aim of addressing the
root causes of the country's external vulnerabilities, such
as the high import content of its exports, the low savings rate
and its modest level of foreign-exchange reserves. In April
2012, the government announced a new investment incentive scheme
that uses tax breaks and interest-rate subsidies to encourage greater
domestic production of intermediate goods in key sectors such as energy,
automotives and mining. The scheme has the potential to not only
reduce the need for Turkish exporters to import these types of goods,
but to also increase foreign direct investment inflows into these sectors,
and thus provide a much more stable source of current-account financing.
The government has also taken action to address the private-sector
savings shortfalls with the passage of legislation on 13 June 2012 that
increases the incentives for individuals to invest in personal pension
schemes. While their impact will take time to materialise,
policies like these should help to address over time the root causes of
Turkey's weak domestic savings rate, which currently renders
the country vulnerable to swings in risk perception among foreign-bank
lenders and institutional investors. For example, Turkey's
2011 external vulnerability indicator (EVI), which is the ratio
of external debt payments to official foreign-exchange reserves,
was 173.8, as compared to a Ba1 median of 66.2 and
a Baa3 median of 55.8. Looking ahead, some of Turkey's
external vulnerabilities, such as the current account deficit,
are now starting to become less pronounced. Moreover, Turkey's
real external vulnerabilities situation may be more favourable than the
headline data suggest, as indicated by the net errors and omissions
position in its balance of payments.
Although not a specific driver of today's rating action, Turkey's
current Ba1 rating level is also underpinned by the country's considerable
economic strengths, such as its size and dynamism. The country's
diversification is also an important strength, especially since
it has reduced its trade dependence on the European Union in recent years
-- a development that should provide the country with some additional
shock-absorption capacity should macroeconomic stress in the euro
area intensify further. Turkey's creditworthiness is also
supported by a well-capitalised banking sector.
WHAT COULD MOVE THE RATING UP/DOWN
Turkey has considerable economic strengths, such as its size,
dynamism and its economic influence in both Europe and the Middle East.
As mentioned above, the government's financial strength is
also an advantage for the country. However, a prerequisite
for Turkey attaining an investment-grade rating is a greater resilience
to balance-of-payment shocks, such as a sharp decline
in capital inflows into Turkey from foreign-bank lenders and/or
institutional investors. Moody's would also consider upgrading
Turkey's rating if the government made further progress in lowering
its external vulnerabilities by structurally reducing its current account
deficit, increasing foreign-exchange reserves, or reducing
the private sector's external borrowing.
Turkey's currently positive outlook on its sovereign bond rating
would likely be moved to stable if progress on addressing external vulnerabilities
were to be reversed. A material deterioration in the government's
public-finance metrics would also result in downward movement in
the outlook or, in extremis, the rating itself. Although
not likely given the country's improved resilience, Moody's
believes that a sudden and sustained stop in foreign capital flows would
exert downward pressure on the ratings.
COUNTRY CEILINGS
As part of today's rating actions, Moody's has adjusted
Turkey's long-term foreign-currency bond ceiling to
Baa2 from Ba1, its short-term foreign-currency bond
ceiling has been changed to Prime-2 from Not-Prime,
its long-term foreign-currency deposit ceiling has been
raised to Ba2 from Ba3. The rating agency has also adjusted Turkey's
local-currency bond and deposit ceilings to A3 from A2 to better
capture the country's system risk and the default correlation between
the government and private-sector borrowers.
The principal methodology used in these ratings was Sovereign Bond Ratings
published in September 2008. Please see the Credit Policy page
on www.moodys.com for a copy of this methodology.
REGULATORY DISCLOSURES
For ratings issued on a program, series or category/class of debt,
this announcement provides relevant regulatory disclosures in relation
to each rating of a subsequently issued bond or note of the same series
or category/class of debt or pursuant to a program for which the ratings
are derived exclusively from existing ratings in accordance with Moody's
rating practices. For ratings issued on a support provider,
this announcement provides relevant regulatory disclosures in relation
to the rating action on the support provider and in relation to each particular
rating action for securities that derive their credit ratings from the
support provider's credit rating. For provisional ratings,
this announcement provides relevant regulatory disclosures in relation
to the provisional rating assigned, and in relation to a definitive
rating that may be assigned subsequent to the final issuance of the debt,
in each case where the transaction structure and terms have not changed
prior to the assignment of the definitive rating in a manner that would
have affected the rating. For further information please see the
ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.
The ratings have been disclosed to the rated entities or their designated
agent(s) and issued with no amendment resulting from that disclosure.
Information sources used to prepare each of the ratings are the following:
parties involved in the ratings, parties not involved in the ratings,
and public information.
Moody's considers the quality of information available on the rated
entities, obligations or credits satisfactory for the purposes of
issuing these ratings.
Moody's adopts all necessary measures so that the information it
uses in assigning the ratings is of sufficient quality and from sources
Moody's considers to be reliable including, when appropriate,
independent third-party sources. However, Moody's
is not an auditor and cannot in every instance independently verify or
validate information received in the rating process.
Moody's Investors Service may have provided Ancillary or Other Permissible
Service(s) to the rated entities or their related third parties within
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the lead rating analyst and to the Moody's legal entity that has issued
the rating.
Sarah Carlson
Vice President - Senior Analyst
Sovereign Risk Group
Moody's Investors Service Ltd.
One Canada Square
Canary Wharf
London E14 5FA
United Kingdom
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454
Bart Oosterveld
MD - Sovereign Risk
Sovereign Risk Group
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653
Releasing Office:
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Moody's upgrades Turkey's government bond ratings to Ba1, positive outlook
