London, 03 December 2021 -- Moody's Investors Service ("Moody's") has today
affirmed the Government of Turkey's B2 long-term local and
foreign currency issuer ratings as well as the local and foreign currency
senior unsecured ratings. Concurrently, Moody's has
affirmed the senior unsecured foreign-currency shelf ratings at
(P)B2. The backed foreign-currency senior unsecured ratings
of Hazine Mustesarligi Varlik Kiralama A.S. have also been
affirmed at B2. Hazine Mustesarligi Varlik Kiralama A.S.
is a special purpose vehicle wholly owned by the Republic of Turkey which
is used by the Turkish Treasury to issue sukuk certificates. The
outlook on Turkey and Hazine Mustesarligi Varlik Kiralama A.S.
remains negative.
The decision to affirm Turkey's B2 ratings balances the following
rating factors:
1. Irrespective of the current pressure on the currency,
Turkey's fundamental external vulnerability risk has declined because
of a lower current account deficit supporting a gradual rebuilding of
foreign-currency reserves on a gross and net basis.
2. Turkey's diversified private sector shows relative resilience
to currency volatility as the country's banks and corporates with
borrowings abroad are well hedged against the depreciation of the currency,
including by holding significant foreign-currency deposits abroad.
3. Moody's expects that Turkey's public finances will
remain relatively robust, with public debt staying at around 40%
of GDP in 2022. However, risks have increased as the sharp
currency depreciation will pressure the government's debt ratio
due to a large exposure to foreign currencies.
Despite the improvements noted above, the decision to maintain the
negative outlook predominantly reflects the elevated policy unpredictability,
in particular the central bank's monetary policy stance that is
the cause of pressure on the exchange rate and volatile international
capital flows.
The current economic policy stance will lead to significantly higher inflation
over the coming months, eroding households' purchasing power
and increasing the likelihood of a sharp slowdown in growth despite lower
interest rates. While fiscal policy has remained prudent so far,
the upcoming elections may lead to looser fiscal policy in an effort to
stimulate economic growth. Alternatively, the authorities
may push for large-scale credit stimulus as seen in 2020,
with negative implications for the current account deficit.
Concurrent to today's rating action, Turkey's local-currency
country ceiling remains unchanged at Ba3. The two-notch
gap between the local-currency ceiling and the sovereign rating
mainly balances a relatively limited government footprint in the economy
with unpredictable institutions and government actions, elevated
domestic and geopolitical political risks and significant external imbalances.
The foreign-currency ceiling remains unchanged at B2. The
two-notch gap between the foreign-currency ceiling and the
local-currency ceiling mainly reflects weak policy effectiveness
as well as a still relatively low level of foreign currency reserves.
RATINGS RATIONALE
RATIONALE FOR AFFIRMING THE RATINGS AT B2
FIRST DRIVER: LOWER CURRENT ACCOUNT DEFICIT AND IMPROVED RESERVE
POSITION REDUCE EXTERNAL VULNERABILITY
From a fundamental perspective, and despite the current pressure
on the exchange rate, Turkey's external vulnerability risk
has declined.
Firstly, the current account deficit has more than halved compared
to a year ago, running at around US$18.4 billion (2.4%
of GDP) in the twelve months to September, compared to a deficit
of US$35.0 billion or 4.9% of GDP in 2020.
At the same time, the foreign-currency reserves have more
than doubled to US$79.6 billion as of 26 November compared
to the trough reached in September 2020. If gold reserves are included,
reserves stand at US$119 billion. Although the central bank
has started to sell foreign currency in the past few days, Moody's
does not expect a repetition of last year's depletion of reserves,
given that reserves remain negative to the tune of US$30 billion
if bank reserve requirements and the swaps between the central bank and
the country's commercial banks are deducted.
Secondly, while overall headline external refinancing needs are
large at around US$200 billion or 25% of GDP, more
than half of the total amount comes from stable sources of funding that
do not require confidence-sensitive market access. Trade
credit and non-resident deposits in the banking sector have been
broadly stable over the past years at between US$70-85 billion.
Excluding these and the central bank's swap lines with other central
banks -- which have also been stable -- leaves market-reliant
external refinancing needs at a much more manageable level of around US$90
billion, equivalent to around 12% of GDP.
SECOND DRIVER: TURKEY'S PRIVATE SECTOR IS RELATIVELY RESILIENT
AND WELL PROTECTED AGAINST CURRENCY DEPRECIATION
The second driver for the affirmation of the ratings relates to Turkey's
large and diversified economy. The private sector remains relatively
resilient to the currency's depreciation and shows overall improving
conditions. Moody's expects that real GDP growth will slow
to around 4% in 2022, compared to this year's extraordinary
growth rate that Moody's estimates will come in at around 11%.
This is partly due to lower credit growth -- a positive factor given
that last year's huge credit impulse exacerbated Turkey's
structural external imbalance further. Instead of domestic demand,
exports will likely contribute more strongly to growth in 2022,
benefitting from the weaker currency.
Turkish banks and large corporations -- the main borrowers abroad
-- are well protected against currency depreciation. The banking
sector overall has a broadly balanced FX position, including its
large foreign-currency deposits abroad of US$43 billion.
The corporate sector has significant external liabilities, but its
short-term FX position, defined as short-term assets
minus short-term liabilities, is estimated at a positive
US$60 billion by the central bank as of August 2021. Private
banks have been reducing their external debt consistently over the past
years while state banks remain relatively small external debtors,
accounting for 13% of total external debt and below 8% of
GDP.
THIRD DRIVER: FISCAL ANCHOR REMAINS INTACT SO FAR BUT RISKS INCREASE
DUE TO CURRENCY SENSITIVITY OF PUBLIC DEBT
The third driver of the rating affirmation reflects Turkey's fiscal
metrics. So far, Turkey has maintained its strong fiscal
anchor, with a comparatively low budget deficit in 2020 despite
the coronavirus pandemic; Moody's estimates that the budget
shortfall was 4.2% of GDP for the general government and
a smaller 3.5% of GDP at the central government level last
year. Budget execution data for the first ten months of 2021 point
to a further reduction in the budgetary shortfall this year. Central
government revenues have grown strongly at over 34% compared to
the same period a year earlier, while spending growth has remained
moderate; outside of debt interest spending which has risen sharply
this year, spending growth has remained broadly stable in inflation-adjusted
terms.
The currency depreciation -- by nearly 30% since the central
bank started to ease monetary policy in September -- will raise Turkey's
public debt ratio compared to Moody's earlier expectations.
FX-denominated and FX-linked debt now account for 60%
of the central government's debt, up from less than 40%
in early 2018. Moody's now expects the general government
debt ratio to stand at 39.5% of GDP at year-end,
similar to last year's ratio of 39.7%, but around
four percentage points of GDP higher than Moody's expectation before
the latest currency stress.
RATIONALE FOR MAINTAINING THE NEGATIVE OUTLOOK
The continuing negative outlook mainly reflects Turkey's unpredictable
policymaking. The central bank's cuts to its main policy
rate by 400 basis points since September despite high and rising inflation
are the key contributor to the current currency stress. The frequent
changes of senior staff at the central bank further limits visibility
on the authorities' willingness to deploy policy tools to calm the
situation.
In Moody's view, the current policy stance will lead to significantly
higher inflation over the coming months, eroding households'
purchasing power and increasing the likelihood of a sharp slowdown in
growth despite lower interest rates. While fiscal policy has remained
prudent so far, ongoing currency weakness would negatively impact
the public finances and raise the debt ratio. Also, the upcoming
elections may lead to a looser fiscal policy stance in order to stimulate
economic growth. Alternatively, the authorities may push
for large-scale credit stimulus again, as seen in 2020,
with negative implications for the current account deficit.
ENVIRONMENTAL, SOCIAL AND GOVERNANCE CONSIDERATIONS
Turkey's ESG Credit Impact Score is highly negative (CIS-4),
reflecting material exposure to a number of environmental and social risks
and a weak institutional environment.
Turkey's overall E issuer profile score is moderately negative (E-3),
reflecting exposure to environmental risks across a range of categories,
such as water supply, natural capital, and waste and pollution.
Turkey is vulnerable to water stress and it has seen reductions in winter
precipitation in the western part of the country over the past half century,
which can have an impact on the quantity and quality of water in Turkey's
rivers, which are an important source of drinking water, irrigation,
and power generation.
Its S issuer profile score as also moderately negative (S-3).
While Turkey has a favourable demographic profile, youth unemployment
is high, labour force participation is low and informality is widespread.
High inflation is eroding living standards, adding to social risks.
While the government has undertaken a significant programme of building
"city hospitals" using PPP programmes, the overall provision
of basic services such as safe drinking water and sanitation services
to the population is uneven across the country and weaker than in many
other OECD countries.
Turkey's institutions and governance profile has deteriorated steadily
in recent years and has been a key driver of successive downgrades to
the sovereign's rating. This is captured by a highly negative
G issuer profile score (G-4).
GDP per capita (PPP basis, US$): 30,449 (2020
Actual) (also known as Per Capita Income)
Real GDP growth (% change): 1.8% (2020 Actual)
(also known as GDP Growth)
Inflation Rate (CPI, % change Dec/Dec): 14.6%
(2020 Actual)
Gen. Gov. Financial Balance/GDP: -4.2%
(2020 Actual) (also known as Fiscal Balance)
Current Account Balance/GDP: -4.9% (2020 Actual)
(also known as External Balance)
External debt/GDP: 60.1%
Economic resiliency: ba1
Default history: At least one default event (on bonds and/or loans)
has been recorded since 1983.
On 30 November 2021, 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 increased somewhat.
The issuer's institutions and governance strength, have not materially
changed. The issuer's fiscal or financial strength, including
its debt profile, has not materially changed. The issuer's
susceptibility to event risks has not materially changed.
FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS
WHAT COULD CHANGE THE RATINGS UP
The outlook could return to stable if the currency stabilized and maturing
debt continued to be rolled over smoothly, indicating low risk of
market stress. A change in the monetary policy stance with a focus
on re-anchoring inflation expectations would also be positive.
The ratings could be upgraded if the improvements in the external account
continued apace and foreign-currency reserves were rebuilt further.
A reduction in the share of foreign-currency linked government
debt would also support a higher rating level.
WHAT COULD CHANGE THE RATINGS DOWN
The ratings would come under further downward pressure in a scenario of
further significant currency depreciation that increases the risk of material
deposit withdrawals from the banking system, in contrast to the
current trend of depositors switching to dollar deposits but retaining
savings in the banking sector. Signs that the central bank was
again using foreign-currency reserves in a material fashion to
stem downward pressure on the currency would also be negative.
Excluding reserves effectively borrowed from the banking sector (in the
form of required reserves and swaps with the central bank), foreign-currency
reserves remain negative. Lastly, a change in the fiscal
policy stance -- with materially higher deficits resulting in a rising
debt trend -- would be negative for the ratings.
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
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same series, category/class of debt, security or pursuant
to a program for which the ratings are derived exclusively from existing
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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
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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
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if applicable to jurisdiction: Ancillary Services, Disclosure
to rated entity, Disclosure from rated entity.
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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 http://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1288235.
The Global Scale Credit Rating on this Credit Rating Announcement was
issued by one of Moody's affiliates outside the EU and is endorsed
by Moody's Deutschland GmbH, An der Welle 5, Frankfurt
am Main 60322, Germany, in accordance with Art.4 paragraph
3 of the Regulation (EC) No 1060/2009 on Credit Rating Agencies.
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for additional regulatory disclosures for each credit rating.
Kathrin Muehlbronner
Senior Vice President
Sovereign Risk Group
Moody's Investors Service Ltd.
One Canada Square
Canary Wharf
London E14 5FA
United Kingdom
JOURNALISTS: 44 20 7772 5456
Client Service: 44 20 7772 5454
Alejandro Olivo
MD - Sovereign/Sub Sovereign
Sovereign Risk Group
JOURNALISTS: 44 20 7772 5456
Client Service: 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
Client Service: 44 20 7772 5454
