London, 18 July 2016 -- Moody's Investors Service has today placed Turkey's Baa3 long-term
issuer, senior unsecured bond ratings and (P)Baa3 senior unsecured
shelf rating on review for downgrade.
The review is driven by the need to assess the medium-term impact
of the failed military coup on Turkey's economic growth, policymaking
institutions and external buffers, given the existing challenges
in all of these areas.
Despite the coup's failure, Moody's considers its occurrence
a reflection of broader political challenges, as associated credit
risks remain elevated. These risks and relatedly the country's
slower-than-expected progress in materially advancing planned
economic reforms, in the context of both weakening growth and external
buffers, had been previously captured in Moody's negative
outlook.
Accordingly, in Moody's view, although the coup failed,
the event in itself will likely exacerbate challenges in all of these
areas.
The review will assess the likelihood and implications of: 1) a
sustained slowdown in domestic demand, leading in turn to lower
economic growth for the next 2-3 years; 2) a further weakening
of policy predictability and effectiveness, as well as a rise in
policy inertia; and 3) reduced access to external liquidity,
given the country's high external borrowing needs in the face of
heightened domestic and international market volatility.
Concurrently, Moody's has placed on review for downgrade the Baa3
bond rating of Hazine Mustesarligi Varlik Kiralama A.S.,
a special purpose vehicle wholly owned by the Republic of Turkey.
RATINGS RATIONALE
RATIONALE FOR THE REVIEW FOR DOWNGRADE
The negative outlook assigned to Turkey's Baa3 rating in April 2014
and maintained in December 2015 reflected ongoing risks to the country's
external financing capacity and the lack of visibility on the prospect
for decisive economic reform.
The Moody's review announced today will assess developments in each
area of concern and, in particular, the implications of the
attempted coup of 15 July for the country's growth, policy
effectiveness, and external stability.
FIRST DRIVER -- TO ASSESS LIKELIHOOD THAT MEDIUM-TERM GROWTH
PROSPECTS WILL WEAKEN
Although economic growth in Turkey has been quite resilient to various
shocks over the past 2 years, averaging 3.5%,
we believe that the most recent increase in domestic political uncertainty,
and most specifically the attempted coup, has the potential to significantly
affect the country's growth trajectory negatively, a risk
that we will evaluate during the review.
Already, investment levels in Turkey have been lagging and in the
first quarter of this year, investment turned slightly negative
on a year-on-year basis. Fragile investor confidence,
slowing credit growth, and subdued external markets are expected
to dampen growth this year.
We have lowered our 2016 forecast for growth to 3% and believe
that risks are biased to the downside, in view of the potential
impact of the failed coup on investor and consumer confidence, and
the effect of continued security threats that are in turn a result of
the spill-over from broader, elevated geopolitical risks.
SECOND DRIVER -- ASSESSING GOVERNABILITY AND RISK OF POLICY INERTIA
IN THE COMING YEARS
The Turkish government has identified that reversing slowing growth will
require the implementation of structural reforms both over the short term
and longer term, with the focus on improving productivity and the
investment climate, as well as on increasing the savings rate.
The prospect of the implementation of reforms was a key driver for the
upgrade to investment grade in May 2013. However, since then,
advances in reform have been limited, the slow pace primarily driven
by a heavy electoral calendar and by the distraction from the government's
plans to amend the constitution and introduce a new form of government.
In the meantime, the country's absorption capacity in relation
to the management of domestic and external shocks has reduced.
Consequently, the impact of the failed coup on institutional strength
and specifically on the economic reform agenda will be a critical aspect
of the review process.
THIRD DRIVER—ASSESSING CONTINUED ACCESS TO EXTERNAL LIQUIDITY
The Turkish economy, as a whole, has significant external
financing requirements. First, Turkey needs to finance a
current account deficit, which remains large relative to that of
other emerging market sovereigns, despite a recent improvement tied
to low oil prices; this deficit is now expected to stand at around
3.4% of GDP; and secondly, Turkish corporate,
banking and government sectors need to repay approximately USD197 billion
in external liabilities this year. Together, these needs
are estimated to be around 25% of GDP in 2016 and in 2017.
This large external funding need continues to expose the country to sudden
shifts in investor confidence. Such confidence has already been
weak and volatile over the course of 2015 and the first quarter of 2016,
as reflected in the significant depreciation of the Turkish Lira (vis-a-vis
the US dollar) and the occurrence of substantial portfolio capital outflows.
Moody's believes that these pressures will persist, given the combination
of the external risks facing the country and the rise of domestic political
risk as illustrated by the failed coup.
Looking across the economy in aggregate, the coverage of maturing
external financing (which includes non-resident deposits and short-term
external liabilities) by foreign-exchange reserves positions Turkey
unfavourably vis-a-vis its country's peers, as reflected
in the country's high External Vulnerability Indicator. Moody's
estimates this indicator stood at 189.5% in 2016 and that
it will remain elevated next year.
One mitigating factor is that parts of the Turkish private sector have
buffers which offset some of the current financing challenges and the
banking sector has significant reserves at the central bank which it could
use to meet its maturing external debt during a period of shock.
Nevertheless, Turkey continues to operate in a fragile financial
and geopolitical environment and its external vulnerability is rising,
implying the rising possibility of an escalation in capital outflows,
a more rapid fall in reserves and, in a worst-case scenario,
a balance of payments crisis. The review will assess the extent
to which Turkey's buffers continue to mitigate the risks of external
shocks to a level commensurate with the current Baa3 rating.
COUNTRY CEILINGS
Country ceilings remain unchanged at this time, although they could
be lowered if the review were to conclude with a downgrade of the government
debt ratings. As of today, Turkey's long-term
foreign currency bond ceiling remains unchanged at Baa1, while its
short-term foreign currency bond ceiling is unchanged at P-2.
The long-term foreign currency deposit ceiling is also unchanged
at Baa3, and the short-term foreign currency deposit ceiling
remains at P-3. The long-term local currency bond
and deposit ceilings remain unchanged at A3.
WHAT COULD LEAD TO CONFIRMATION OF THE RATINGS AT CURRENT LEVEL
Moody's would consider confirming the issuer and bond ratings at the current
level of Baa3 if it concludes that Turkey's economy, institutions
and external position can withstand the pressure arising from rising political
risks, by maintaining confidence and growth, advancing economic
reforms, and preventing a further weakening of its balance of payments
and foreign-exchange reserves.
WHAT COULD CHANGE THE RATINGS - DOWN
Moody's could downgrade Turkey's ratings if the review were
to conclude that policy inertia was likely to lead to further delays in
implementing the structural reforms needed to reduce external imbalances
and sustain economic, fiscal and institutional strength; and/or
that the probability has risen of investor risk aversion intensifying
pressures on the country's external finances and heightening the risk
of a sudden and sustained halt in foreign capital flows.
While any downgrade would most likely be limited to one notch, a
more severe downgrade could result were Moody's to conclude that
the impact of policy inertia, allied with the effect of the failed
coup on domestic and external investor confidence, had materially
increased Turkey's vulnerability to a balance of payments crisis.
A military coup attempt in Turkey on 15 July, 2016, an event
classified as a sudden market event, required the publication of
this credit rating action on a date that deviates from the previously
scheduled release date in the sovereign release calendar, published
on www.moodys.com.
GDP per capita (PPP basis, US$): 20,438 (2015
Actual) (also known as Per Capita Income)
Real GDP growth (% change): 4% (2015 Actual) (also
known as GDP Growth)
Inflation Rate (CPI, % change Dec/Dec): 8.8%
(2015 Actual)
Gen. Gov. Financial Balance/GDP: -0.6%
(2015 Actual) (also known as Fiscal Balance)
Current Account Balance/GDP: -4.5% (2015 Actual)
(also known as External Balance)
External debt/GDP: 55.4% (2015 Actual)
Level of economic development: High level of economic resilience
Default history: At least one default event (on bonds and/or loans)
has been recorded since 1983.
On 17 July 2016, a rating committee was called to discuss the rating
of the Turkey, Government of after the attempted military coup.
Other views raised included: The issuer's economic fundamentals,
including its economic strength, could materially decrease.
The issuer's institutional strength/framework, could be negatively
impacted. The issuer has become increasingly susceptible to event
risks.
The principal methodology used in these ratings was Sovereign Bond Ratings
published in December 2015. Please see the Ratings Methodologies
page on www.moodys.com for a copy of this methodology.
The weighting of all rating factors is described in the methodology used
in this credit rating action, if applicable.
REGULATORY DISCLOSURES
For ratings issued on a program, series or category/class of debt,
this announcement provides certain 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 certain regulatory disclosures in relation
to the credit rating action on the support provider and in relation to
each particular credit rating action for securities that derive their
credit ratings from the support provider's credit rating.
For provisional ratings, this announcement provides certain 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.
For any affected securities or rated entities receiving direct credit
support from the primary entity(ies) of this credit rating action,
and whose ratings may change as a result of this credit rating action,
the associated regulatory disclosures will be those of the guarantor entity.
Exceptions to this approach exist for the following disclosures,
if applicable to jurisdiction: Ancillary Services, Disclosure
to rated entity, Disclosure from rated entity.
Regulatory disclosures contained in this press release apply to the credit
rating and, if applicable, the related rating outlook or rating
review.
Please see www.moodys.com for any updates on changes to
the lead rating analyst and to the Moody's legal entity that has issued
the rating.
Please see the ratings tab on the issuer/entity page on www.moodys.com
for additional regulatory disclosures for each credit rating.
Alpona Banerji
VP - Senior Credit Officer
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
Yves Lemay
MD - Sovereign Risk
Sovereign Risk Group
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454
Releasing Office:
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
Moody's places Turkey's Baa3 issuer and bond ratings on review for downgrade
