Paris, September 11, 2020 -- Moody's Investors Service ("Moodys") has today downgraded
the government of Turkey's issuer and senior unsecured debt ratings
to B2 from B1 and downgraded its senior unsecured shelf rating to (P)B2
from (P)B1. The negative outlook has been maintained. Moody's
has also downgraded the senior unsecured backed debt rating of Hazine
Mustesarligi Varlik Kiralama A.S. to B2 from B1, a
special purpose vehicle wholly owned by the Republic of Turkey from which
the Treasury issues sukuk certificates. The negative outlook has
been maintained for this issuer.
The three key drivers for the downgrade are:
1. Turkey's external vulnerabilities are increasingly likely
to crystallise in a balance of payments crisis.
2. As the risks to Turkey's credit profile increase,
the country's institutions appear to be unwilling or unable to effectively
address these challenges.
3. Turkey's fiscal buffers, which have been a source
of credit strength for many years, are eroding.
The maintenance of the negative outlook reflects the view that fiscal
metrics could deteriorate at a faster pace than currently anticipated
in the coming years. It also reflects the downside risks associated
with the authorities' inadequate reaction function, which
makes Turkey more likely to suffer a full-blown balance of payments
crisis in the coming years. Finally, it reflects elevated
levels of geopolitical risk on several fronts—the relationship with
the United States (US, Aaa stable), the relationship with
the European Union (EU, Aaa stable), and tensions in the Eastern
Mediterranean—that could be an accelerant for any crisis.
In a related decision, Moody's lowered Turkey's long-term
country ceilings: the foreign currency bond ceiling to B2 from B1;
its foreign currency deposit ceiling to Caa1 from B3; and its local
currency bond and deposit ceilings to Ba3 from Ba2. The short-term
foreign currency bond ceiling and short-term foreign currency deposit
ceiling remain unchanged at Not Prime (NP). Ceilings generally
act as the maximum ratings that can be assigned to a domestic issuer in
Turkey, including structured finance securities backed by Turkish
receivables. The alignment of the foreign currency bond ceiling
and the government bond ratings reflects Moody's view that exposure to
a single, common threat—loss of external confidence and capital—means
that the fortunes of public and private sector entities in Turkey are,
from a credit perspective, increasingly intertwined.
RATINGS RATIONALE
RATIONALE FOR DOWNGRADE TO B2 FROM B1
FIRST DRIVER: TURKEY'S EXTERNAL VULNERABILITIES ARE INCREASINGLY
LIKELY TO CRYSTALLISE IN A BALANCE OF PAYMENTS CRISIS
Turkey's foreign-currency reserves have been drifting downward
for years on both a gross and a net basis but are now at a multi-decade
low as a percentage of GDP because of the central bank's unsuccessful
attempts to defend the lira since the beginning of 2020. Gross
foreign-exchange reserves (excluding gold, in line with Moody's
methodology) are currently at $44.9 billion (as of 4 September),
over a 40% decline since the beginning of the year. Turkey
has tried a number of measures to increase gross reserves—including
a tripling of the country's swap line with Qatar to $15 billion
and increasing banks' reserve requirements—but by any measure
this is an exceptionally low buffer when measured against upcoming external
debt payments. Moody's forecasts that the country's
external vulnerability indicator (EVI), an indicator of the adequacy
of foreign currency reserves to cover external debt repayments and nonresident
deposits, will rise from 263% in 2019 to 409% in 2021,
which represents heightened exposure to changes in international investor
sentiment. In a crisis, the authorities could use the commercial
banks' reserves of US$44 billion deposited at the central bank
to repay maturing external debt, which is why Moody's uses
gross reserves in its EVI calculation. However, such a situation
would increase the risk that the government impose restrictions to safeguard
its scarce FX assets.
In fact, if banks' required reserves for TL and FX liabilities
are netted out, net foreign-exchange reserves are now close
to zero. Moreover, the reliance on swaps has grown at a very
rapid pace in 2020. As of the end of July, the Turkish central
bank had a $53 billion net short position in the swap market,
up from $30 billion in March. In other words, all
the commercial banks' reserves at the central bank are insufficient
to cover this short position if these swaps were not rolled over.
Turkey does hold substantial gold reserves, and due to both increases
in the gold price and an increase in gold volumes held, gold holdings
are now broadly equal to FX reserves ($42.7 billion at the
beginning of September).
The lower gross and net reserves go, the more likely it is that
Turkey experiences a severe BoP crisis, causing acute disruptions
to economic activity and further deterioration in the government's
balance sheet. In the past, when the economy came under pressure,
Turkey's flexible exchange rate acted as a shock absorber that has insulated
the real economy from macroeconomic shocks and allowed the country to
muddle through without addressing its structural imbalances. More
recently, the authorities have been unwilling to allow the lira
to float freely because of the economic consequences of a weaker currency.
Turkey's weaker exchange rate does not have as much of an impact on growth
and export competitiveness of goods as it does in many other countries
because of the high import content of exports in some exporting industries.
That said, the tourism industry is highly responsive to a more competitive
exchange rate, and periods of exchange rate weakness often coincide
with tourist arrivals hitting record levels. This was certainly
the case in 2019, when import compression and a very strong tourism
season helped to shift Turkey's current-account deficit into surplus.
However, in light of the pandemic's impact on the tourism
industry, Turkey will not reap this benefit next year, and
Moody's base case is that globally the industry will only make a
partial recovery to pre-pandemic levels in 2021. While recent
gas finds could provide some support to the current account balance,
in Moody's view they will not come on stream quickly enough to mitigate
these broader risks to Turkey's external accounts.
Dollarisation is a significant issue for Turkey that heightens the risk
of a balance of payments crisis; it has the second-highest
dollarisation vulnerability indicator in the single B-rated universe.
The country had de-dollarised in the early 2000s because of growing
confidence in the domestic economy. However, in recent years
Moody's has observed progressively higher levels of dollarisation,
and since 2018 the share of deposits that are denominated in hard currencies
such as US dollars or euros have accounted for over 50% of the
total deposits in the banking system.
SECOND DRIVER: AS THE RISKS TO TURKEY'S CREDIT PROFILE INCREASE,
THE COUNTRY'S INSTITUTIONS APPEAR TO BE UNWILLING OR UNABLE TO EFFECTIVELY
ADDRESS THESE CHALLENGES
The second factor informing today's rating action is Moody's
view that Turkey's policy credibility and effectiveness, elements
that the rating agency considers a governance factor under its ESG framework,
have weakened.
At the moment, political pressures and limited central bank independence,
a slow reaction function of the monetary authorities, and a lack
of predictability in their reaction function increases the probability
of a disorderly exchange rate and economic adjustment. The policy
rate is now negative in real terms, inflation remains well above
target, and inflation expectations are rising. However,
the central bank has taken only modest action to tighten monetary policy.
The longer this goes on, the more likely it is that there will be
continued downward pressure on the currency.
Moreover, Turkey's longstanding commitment to a floating exchange
rate since 2001 was an important institutional source of insulation from
a balance of payments crisis because the exchange rate could act as a
shock absorber. Given the scale and number of interventions and
regulatory actions in the FX market this year, it is difficult to
see the lira as being governed by a floating currency regime.
Turkey's structural economic challenges are clear, and Moody's
believes that the Turkish authorities understand that the economy's chronic
shortfall in domestic savings generates significant imbalances and an
over-dependence on foreign sources of capital. Turkey also
suffers from labour-market rigidities that inhibit job creation.
Productivity is also weak, which in some sectors underpins structurally
high inflation. International observers such as the EU, IMF,
and OECD point to weak educational outcomes as a key driver of weak productivity
and employment outcomes. Making structural changes that address
these fundamental challenges can inflict short-term pain on the
economy and the benefits of reform could take years to materialise.
Policy initiatives in recent years have come short in terms of addressing
the structural underpinnings of Turkey's macroeconomic problems,
pointing to a lack of willingness or capacity to tackle these economic
vulnerabilities. Moreover, growth-supporting measures
have gone in the opposite direction and have relied on credit growth (and
fiscal or quasi-fiscal stimulus). Starting in the second
half of 2019, state-owned banks were encouraged to expand
credit creation to counter the economic downturn. They adopted
special programmes to assume and restructure credit card and other consumer
debt at extended maturities and below market rates. Credit growth
has remained high in 2020 due to measures taken by the banking regulator
to support domestic demand during the pandemic. Some of those measures
are being withdrawn now, but credit growth will remain high through
the end of the year.
THIRD DRIVER: TURKEY'S FISCAL BUFFERS, WHICH HAVE BEEN
A SOURCE OF CREDIT STRENGTH FOR MANY YEARS, ARE ERODING
Earlier this summer, Moody's reduced Turkey's fiscal
strength factor score by two notches to "ba1" as debt affordability
weakened markedly due to rising government debt levels, as well
as a weaker debt structure that renders the government's finances
more vulnerable to high inflation and currency depreciation than was the
case only a few years ago. The fact that Turkey has had to contend
with two crises since 2018 has taken a toll on the public finances even
though the government's fiscal response to the pandemic has been
relatively modest. The weak growth performance and fiscal measures
to manage the economic effects of the coronavirus will have a meaningful
impact on the deficit in 2020, and Moody's forecasts that
it will rise to 7.5% of GDP (using the IMF definition,
which excludes one-off revenue sources).
In addition to the widening primary balance, the depreciation of
the lira and high inflation will contribute to an increase in the debt
burden and higher interest payments on account of an increased reliance
on domestic and floating-rate borrowing which comes at the expense
of higher yields. As a result, Moody's forecasts the
government debt burden to increase from 32.5% in 2019 to
42.9% in 2020 and the debt affordability ratio (the ratio
of general government interest payments to general government revenues)
will deteriorate to 8.8% in 2020, up from 7.3%
in 2019 and 5.8% in 2018. Under our baseline scenario,
the return to growth after the economic shock of 2020 will not suffice
to offset the impact on the upward debt trajectory of primary deficits
of around 2% and an increasing interest burden. Therefore,
Moody's expects Turkey's debt burden to increase to above
46% of GDP in the coming years. While Turkey's debt
metrics are still more favourable—sometimes by a significant margin—than
those of similarly rated peers, in Moody's view the deterioration
in debt metrics outlined above means that Turkey's fiscal strength
no longer offsets the country's other credit challenges to the same
degree that it has in the past.
This situation could be exacerbated if, for example, the government's
desire to revive growth were to lead to even larger budget deficits than
expected and if it needed to cover obligations on public-private
partnerships (PPPs) or guaranteed debts.
RATIONALE FOR NEGATIVE OUTLOOK
The maintenance of the negative outlook reflects the view that fiscal
metrics could deteriorate at a faster pace than currently anticipated
in the coming years. It also reflects the downside risks associated
with the authorities' inadequate reaction function, which
makes Turkey more likely to suffer a full-blown balance of payments
crisis in the coming years. Finally, it reflects elevated
levels of geopolitical risk on a number of fronts—the relationship
with the US, the relationship with the EU, and tensions in
the Eastern Mediterranean—that could be an accelerant for any crisis.
ENVIRONMENTAL, SOCIAL, GOVERNANCE CONSIDERATIONS
Moody's takes account of the impact of environmental (E),
social (S), and governance (G) factors when assessing sovereign
issuers' economic, institutional, and fiscal strength
and their susceptibility to event risk. In the case of Turkey,
the materiality of ESG to the credit profile is as follows.
Environmental considerations are not material to Turkey's credit
profile, and the country has not been identified as being one of
the sovereigns materially exposed to physical climate change risks.
Turkey experiences some environmental pressures because of rapid population
growth, which translated into industrialisation and rapid urbanisation.
While this results into increased pollution and some degree of environmental
degradation, these considerations are not material to Turkey's
credit profile.
Regarding social considerations, while Turkey is faced with labor
market rigidities and low female participation rate, these credit
features are mitigated by Turkey's youthful population, which
underpins its positive but slowing growth potential. In addition,
Moody's regards the coronavirus outbreak as a social risk under
our ESG framework, given the substantial implications for public
health and safety as well as the economic fiscal implications of the pandemic.
Our assessment of Turkey's weak and deteriorating governance has
been an important credit feature, which underpinned our decision
to downgrade Turkey's rating by multiple notches since the introduction
of the presidential system in mid-2018. Since then,
it has become frequent practice in Turkey for official decrees ordering
sometimes significant changes in laws and practices to be no longer required
to go through parliament to gain approval. These interventions
have become more frequent since the 2018 market pressures. Moreover,
the executive continues to undermine the independence of key institutions
that meaningfully undermines those institutions' credibility and effectiveness.
The publication of this rating action deviates from the previously scheduled
release dates in the sovereign calendar published on www.moodys.com.
This action was prompted by the recent deterioration in Turkey's
external fundamentals that make a balance of payments crisis more likely
and therefore pressured the previous rating of B1.
GDP per capita (PPP basis, US$): 28,268 (2019
Actual) (also known as Per Capita Income)
Real GDP growth (% change): 0.9% (2019 Actual)
(also known as GDP Growth)
Inflation Rate (CPI, % change Dec/Dec): 13.5%
(2019 Actual)
Gen. Gov. Financial Balance/GDP: -4.5%
(2019 Actual) (also known as Fiscal Balance)
Current Account Balance/GDP: 1.2% (2019 Actual) (also
known as External Balance)
External debt/GDP: 57.4% (2019 Actual)
Economic resiliency: ba2
Default history: At least one default event (on bonds and/or loans)
has been recorded since 1983.
On 08 September 2020, a rating committee was called to discuss the
rating of the Turkey, Government of. The main points raised
during the discussion were: The issuer's economic fundamentals,
including its economic strength, have materially decreased.
The issuer's institutions and governance strength, have materially
decreased. The issuer has become increasingly susceptible to event
risks. Other views raised included: The issuer's fiscal or
financial strength, including its debt profile, has not materially
changed.
FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS
WHAT WOULD CHANGE THE RATING UP
Given the negative outlook, a positive outlook or an upgrade is
highly unlikely. However, the rating outlook could stabilise
if fiscal and monetary policies become more coherent in preventing further
exposure to a balance of payment crisis near term. External financial
support could also be credit supportive, as would diminished tensions
with the US and the EU. A determined set of economic reforms that
address the economy's structural imbalances while capitalising on the
country's inherent strengths could lead to upward rating pressure
over the medium term.
WHAT WOULD CHANGE THE RATING DOWN
Turkey's rating would likely be downgraded if there was an increasing
likelihood that the current balance of payments pressures were going to
deteriorate into a full-blown crisis. In such an event,
the government could try to conserve scarce FX assets by imposing restrictions
on foreign-currency outflows that affect sovereign creditors as
well.
The principal methodology used in these ratings was Sovereign Ratings
Methodology published in November 2019 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1158631.
Alternatively, please see the Rating 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 further specification of Moody's key rating assumptions and
sensitivity analysis, see the sections Methodology Assumptions and
Sensitivity to Assumptions in the disclosure form. Moody's
Rating Symbols and Definitions can be found at: https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_79004.
For ratings issued on a program, series, category/class of
debt or security this announcement provides certain regulatory disclosures
in relation to each rating of a subsequently issued bond or note of the
same series, category/class of debt, security 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.
The ratings have been disclosed to the rated entity or its designated
agent(s) and issued with no amendment resulting from that disclosure.
These ratings are solicited. Please refer to Moody's Policy
for Designating and Assigning Unsolicited Credit Ratings available on
its website www.moodys.com.
Regulatory disclosures contained in this press release apply to the credit
rating and, if applicable, the related rating outlook or rating
review.
Moody's general principles for assessing environmental, social
and governance (ESG) risks in our credit analysis can be found at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1133569.
At least one ESG consideration was material to the credit rating action(s)
announced and described above.
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.
Sarah Carlson, CFA
Senior Vice President
Sovereign Risk Group
96 Boulevard Haussmann
Paris 75008
France
JOURNALISTS: 44 20 7772 5456
Client Service: 44 20 7772 5454
Yves Lemay
MD-Sovereign/Sub Sovereign
Sovereign Risk Group
JOURNALISTS: 44 20 7772 5456
Client Service: 44 20 7772 5454
Releasing Office:
Moody's France SAS
96 Boulevard Haussmann
Paris 75008
France
JOURNALISTS: 44 20 7772 5456
Client Service: 44 20 7772 5454
