London, 23 September 2016 -- Moody's Investors Service has today downgraded the Government of Turkey's
long-term issuer and senior unsecured bond ratings to Ba1 from
Baa3 and assigned a stable outlook. This concludes the review for
downgrade that was initiated on 18 July. The drivers of the downgrade
are as follows:
1. The increase in the risks related to the country's sizeable
external funding requirements.
2. The weakening in previously supportive credit fundamentals,
particularly growth and institutional strength.
The stable outlook balances downside risks arising from the erosion in
Turkey's economic resilience and increasing balance of payments
pressures against credit-positive considerations arising from its
large and flexible economy which continues to register positive growth
and the government's strong fiscal track record.
Concurrently, Moody's has downgraded to Ba1 from Baa3 the senior
unsecured bond rating of Hazine Mustesarligi Varlik Kiralama A.S.,
a special purpose vehicle wholly owned by the Republic of Turkey;
and assigned a stable outlook.
In conjunction with today's rating actions, Moody's has also lowered
Turkey's long-term foreign-currency bond ceiling to Baa2
from Baa1, and its long-term foreign-currency deposit
ceiling to Ba2 from Baa3. Turkey's short-term foreign-currency
deposit ceiling has been lowered to NP from P-3, and the
country's short-term foreign-currency bond ceiling to P-3
from P-2. Furthermore, Turkey's local currency
bond and deposit ceilings have been lowered to Baa1 from A3.
A full list of affected ratings is provided towards the end of this press
release.
RATINGS RATIONALE
In recent years, Turkey's credit profile has presented a marked
contrast between significant external imbalances which heighten its exposure
to external shocks and/or loss of confidence, and a strong government
balance sheet, supported by a robust fast-growing economy.
The upgrade to Baa3 in May 2013 reflected two things. First,
increasing assurance that credit strengths such as economic growth and
fiscal performance were likely to be sustained at levels compatible with
a Baa3 rating. And second, an assumption that political stability
would enable planned structural reform implementation to address external
imbalances, such as promoting domestic savings and reducing the
economy's reliance on imports (across a range of sectors including
energy) and imported capital.
However, since the upgrade in 2013, the risk of a shock arising
as a result of the country's weak external position has become more
pronounced, given the combination of persistently high political
risks and volatile investor sentiment. Moreover, credit fundamentals
that had previously supported a Baa3 rating (e.g.,
high levels of institutional strength and a healthy economic outlook)
have deteriorated. In particular, Moody's expects growth
will slow over the coming years, as constraints on the externally-funded,
consumption-fuelled economy emerge, the reform agenda slows
further and the investment climate remains weak.
Moody's believes that this slow deterioration in Turkey's
credit profile will continue over the next 2-3 years and the balance
of risks are better captured at a Ba1 rating level. The stable
outlook on the Ba1 rating reflects the strengths in the credit profile,
namely the government's robust balance sheet, which would
allow for the absorption of shocks and flexible responses.
FIRST DRIVER: ELEVATED RISKS RELATED TO THE COUNTRY'S SIZEABLE
EXTERNAL FUNDING REQUIREMENTS
Moody's notes that Turkey continues to operate in a fragile financial
and geopolitical environment and that its external vulnerability has risen,
both over the past two years and more recently as a result of unpredictable
political developments and volatile investor perception. This has
credit implications for Turkey given its dependence on foreign capital.
The risk of a sudden, disruptive reversal in foreign capital flows,
a more rapid fall in reserves and, in a worst-case scenario,
a balance of payments crisis has increased.
Turkey's current account deficit remains elevated (4.3%
and 4% forecast in 2016 and 2017 respectively) and exceeds those
of other similarly rated sovereigns despite a recent improvement tied
to low oil prices. In particular, the upsurge in security-related
incidents, specifically in Ankara and Istanbul, and the sanctions
that were imposed by Russia last year have had an adverse impact on the
tourism sector in Turkey, which accounts for 4.4%
of GDP and around 15% of total current receipts (2015).
In the first half of this year, tourist arrivals and revenues were
down 27.9% and 28.2% (compared to the same
period last year) respectively. While the removal of Russian sanctions
is likely to provide some support to the sector, full normalization
will be delayed as long as political and security risks remain elevated.
Additionally, the country's external indebtedness has risen.
According to our estimates, Turkish corporate, banking and
government sectors need to repay approximately $155.8 billion
in external liabilities this year. Together with the current account
deficit, this amounts to an estimated 26% of GDP in 2016
and in 2017. This large external funding need exposes the country
to sudden shifts in investor confidence, which has been weak and
volatile over the past 18 months, as reflected in the volatility
of the Turkish lira (vis-a-vis the US dollar) and substantial
volatility in portfolio flows.
Although debt rollover rates have shown resilience over that period,
including recently following the coup attempt, with only a modest
re-pricing of new facilities, Moody's believes that
the combination of elevated external financing needs, the rise of
domestic political risk, and the persistence of geopolitical threats
in combination with volatile financing environment raises the risk of
a balance of payments crisis in Turkey beyond that which prevailed at
the time of the upgrade.
Furthermore, external buffers to withstand external shocks remain
low. Looking across the economy in aggregate, Moody's
External Vulnerability Indicator (which reflects the coverage of maturing
external financing, including non-resident deposits and short-term
external liabilities, by foreign-exchange reserves excluding
gold) positions Turkey unfavorably vis-a-vis its peers.
Moody's estimates that this indicator stood at 187.3% in
2016, more than 20 percentage points above the level in 2013,
and that the indicator will remain at an elevated level for the foreseeable
future.
That said, a mitigating factor is that the Turkish banking sector
has foreign-currency reserves at the central bank amounting to
around 11% of GDP (end 2015). In the event of systemic stress,
these buffers along with liquid assets on the banks' balance sheet
would be sufficient to cover banking sector liabilities due over the next
12 months. In contrast, the government is in a weaker position
to support the economy as a whole: net foreign exchange reserves
(excluding foreign exchange reserves held by the banking system at the
central bank) account for around 30% of total gross foreign exchange
reserves (as of end 2015), limiting the central bank's ability
to intervene in the currency markets.
SECOND DRIVER -- WEAKENING OF PREVIOUSLY SUPPORTIVE CREDIT FUNDAMENTALS
In Moody's view, the erosion of Turkey's institutional
strength, which was evident prior to the failed coup attempt but
which the event may exacerbate, has negative implications both for
the level of growth in the coming years and for the implementation of
the structural changes the government has identified are needed to deliver
balanced, sustainable growth and relieve external pressures.
Turkey's institutional strength has eroded since the rating agency
assigned a negative outlook to the rating in April 2014. Qualitative
surveys on Turkey's institutions began to erode two years ago particularly
reflected in the Worldwide Governance Indicators for control for corruption
and more recently reflected in the World Economic Forum's Competitiveness
Indicator where the assessment of institutions experienced the most severe
drop, falling 11 places to 75 (out of 140).
More recently, the government's response to the unsuccessful
coup attempt raises further concerns regarding the predictability and
effectiveness of government policy and the rule of law going forward.
This has consequences for both institutional and economic strength.
As one example, the large-scale suspensions in the civil
service raise doubts over the capacity of Turkey's policy making
institutions to make meaningful further progress in both legislating and
implementing the reform program. As another, the government's
actions in the private sector towards institutions that have ties to the
Gulen movement are likely to affect the country's growth trajectory negatively,
by raising concerns regarding the protection of private investment and
the investment climate in general.
As a consequence, the rating agency now expects real GDP will grow
at an average of 2.7% over the 2016-19 period,
which is significantly lower than the average growth of 5.5%
over 2010-14 and also lower than its forecasts when it upgraded
Turkey to Baa3 in May 2013.
Moreover, although the government has made some progress on its
reform agenda earlier in the year and passed an important savings-oriented
reform policy after the failed coup attempt, Moody's believes
that that the prospect of sustained reform implementation that decisively
moves the economy from consumption- and external capital-driven
growth to a more balanced growth model is low. Weakened institutions
will likely face the distraction of constitutional change at the same
time as struggling to balance the tensions inherent in the need to simultaneously
boost near-term growth, deal with heightened security risks
and consolidate power in a post- coup environment. As a
result, external risks are unlikely to diminish in the coming years,
and may rise.
RATIONALE FOR A STABLE OUTLOOK
Moody's decision to assign a stable outlook reflects the balance of risks
at the Ba1 rating level. Turkey's headline fiscal metrics
are still favorable, notwithstanding the fact that the country has
only just completed an almost two-year electoral cycle.
Since the beginning of 2009, Turkey's debt burden has fallen by
more than 13 percentage points to 32.9% of GDP in 2015.
Under the baseline, Moody's expects the debt ratio to remain broadly
stable at 32.2% of GDP in 2016.
Moreover, Turkey's ability to finance its outstanding stock of debt
is supported by the relatively low share of central government foreign-currency-denominated
debt (35.1% 2015, down from 46.3% in
2003) and the favorable maturity profile of the central government's debt
stock: a significant portion of the central government debt stock
is contracted under fixed rates and the average maturity of the central
government debt stock is now 6.3 years (and the maturity of its
external debt stock is now almost 10 years). This favorable structure
mitigates somewhat the impact of a further depreciation of the Turkish
lira against the US dollar, and from a rise in global interest rates
on the government's balance sheet. In fact, the central
government's external debt payments due next year are modest at only $11.3
billion (1.5% of forecast 2017 GDP). Looking ahead,
Turkey's policy direction and its ability to maintain fiscal stability
in an environment of prolonged lower growth (than previously seen) will
be an important driver of sovereign creditworthiness.
WHAT COULD MOVE THE RATING UP/DOWN
Upward movement in Turkey's sovereign rating will be constrained by balance-of-payments
factors as long as external imbalances remain large. However,
upward rating pressure could materialize in the event of structural reductions
in these vulnerabilities or material improvements in Turkey's institutional
environment or competitiveness. Reductions in political risk emanating
either from the geopolitical or in the domestic political environment,
while credit positive, would not result in upward rating action
in the absence of other credit improvements.
Downward pressures on Turkey's sovereign rating could emerge if one or
a combination of the following occur: (1) trends in the public finances
were to be materially reversed; (2) a sudden and sustained reversal
in foreign capital flows; (3) a more than anticipated erosion of
institutional strength or an increase in political risks greater than
what has been anticipated.
Prompted by the factors described above, the publication of this
credit rating action occurs on a date that deviates from the previously
scheduled release date in the sovereign release calendar, published
on www.moodys.com.
GDP per capita (PPP basis, US$): 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: Moderate level of economic resilience
Default history: At least one default event (on bonds and/or loans)
has been recorded since 1983.
On 20 September 2016, 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 institutional strength/framework,
has materially decreased. The issuer has become increasingly susceptible
to event risks. Other views raised included: The issuer's
economic fundamentals, including its economic strength, are
eroding. The issuer's governance and/or management, have
eroded. The issuer's fiscal or financial strength, including
its debt profile, has not materially changed.
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.
Downgrades:
..Issuer: Turkey, Government of
....LT Issuer Rating, Downgraded to
Ba1 from Baa3
....Senior Unsecured Regular Bond/Debenture,
Downgraded to Ba1 from Baa3
....Senior Unsecured Shelf, Downgraded
to (P)Ba1 from (P)Baa3
..Issuer: Hazine Mustesarligi Varlik Kiralama A.S.
....Senior Unsecured Regular Bond/Debenture,
Downgraded to Ba1 from Baa3
Lowers:
..Issuer: Turkey, Government of
....Country Ceiling Bank Deposit Rating,
Downgraded to Ba2 from Baa3
....Country Ceiling Bank Deposit Rating,
Downgraded to NP from P-3
....Country Ceiling Bond Rating, Downgraded
to Baa2 from Baa1
....Country Ceiling Bond Rating, Downgraded
to P-3 from P-2
Outlook Actions:
..Issuer: Turkey, Government of
....Outlook, Changed To Stable From
Rating Under Review
..Issuer: Hazine Mustesarligi Varlik Kiralama A.S.
....Outlook, Changed To Stable From
Rating Under Review
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
