New York, March 17, 2017 -- Moody's Investors Service ("Moody's") has today changed Turkey's rating
outlook to negative from stable. Moody's has also affirmed Turkey's
government debt and issuer ratings at Ba1 and shelf ratings at (P)Ba1.
RATINGS RATIONALE
The change in the rating outlook to negative captures a combination of
inter-related drivers:
- The continuing erosion of Turkey's institutional strength;
- Its weaker growth outlook;
- Heightened pressures on Turkey's public and external accounts;
- And in consequence, the increased risk of a credit shock.
The affirmation of Turkey's Ba1 rating reflects the government's
high economic and fiscal strength, which continues to provide a
buffer against the risks posed by its diminished institutional strength
and high external vulnerability; and the economy's intrinsic
dynamism, which Moody's would expect to be revitalized if
structural reforms were enacted as intended and political uncertainty
was reduced.
Concurrently, Moody's has affirmed the Ba1 senior unsecured
bond rating of Hazine Mustesarligi Varlik Kiralama A.S.,
a special purpose vehicle wholly owned by the Republic of Turkey.
The outlook was changed to negative from stable.
Turkey's country ceilings remain unchanged at Baa2/Prime-3
(foreign currency bonds), Ba2/NP (foreign currency bank deposits)
and Baa1 (local currency debt and deposits).
RATIONALE FOR CHANGING TURKEY'S RATING OUTLOOK TO NEGATIVE FROM STABLE
Since Moody's last rating action in September, domestic and
external pressures on Turkey's credit profile have risen materially.
The tense domestic political environment following last July's failed
coup has persisted for longer than expected, a situation that the
referendum on April 16 to centralize executive powers within the presidency
is unlikely to alter given the large divide between the ruling Justice
and Development (AK) Party and the opposition over the proposed constitutional
changes. The actions taken to reduce various forms of opposition
to the government since July last year have undermined the country's
administrative capacity and damaged private sector confidence.
Partly as a consequence, Turkey has experienced a further slowdown
in growth. While Moody's expects the particularly poor economic
performance registered in the third quarter of 2016 to be temporary,
the impact of ongoing political and geopolitical tensions on domestic
confidence, and the heightened external pressures that led to a
steep depreciation of the lira and high inflation, will suppress
growth in the near-term relative to expectations last year.
Over the longer term, potential growth will remain relatively low
by historical standards in the continued absence of the structural economic
reforms originally planned, such as in the labor market, to
boost sagging productivity.
The authorities' policy response has focused primarily on supporting
short-term economic activity and has increased moral hazard.
The central bank has relaxed macro-prudential rules in order to
stimulate credit growth, reversing measures undertaken in 2012-2014
to restrain growth in household debt. The authorities have encouraged
banks to increase lending, to restructure payment schedules and
to allow companies to repay foreign currency-denominated loans
in Turkish lira at a favorable exchange rate. And the central bank
has held its key policy interest rate negative in real terms in the face
of rising inflationary pressures (with inflation exceeding the 5%±2%
target), primarily it seems to avoid increasing financing pressures
on domestic firms. Moody's believes that such measures risk
increasing macro-economic imbalances, while failing to address
the fundamental structural issues impeding growth.
According to Moody's, weaker growth is negatively impacting
Turkey's key credit anchor -- its healthy public finances and
low government debt. The government has taken a range of measures
to mitigate the domestic impact of the sluggish economy, including
providing wage subsidies to firms and postponing the due dates for their
tax and social security payments. Stopping such support will be
difficult since the factors weighing on consumption and investment,
such as higher inflation and interest rates and declining productivity,
are structural rather than cyclical. Moody's expects the
increase in government spending to continue into 2018, the fiscal
deficit to widen and bond yields to continue to rise, with adverse
implications for Turkey's debt metrics.
Turkey's external vulnerability is a long-standing credit
weakness, but has been accentuated in recent months by a number
of factors. While some, such as rising US interest rates,
are external to Turkey, most reflect domestic developments that
have undermined domestic and foreign investor confidence, or geopolitical
considerations, such as terrorist attacks, that have had significant
adverse consequences for tourism. The lira has weakened sharply,
with capital inflows intermittently insufficient to finance the current
account, eroding the central bank's already weak foreign exchange
reserve buffer. As a consequence, Turkey's External
Vulnerability Indicator remains elevated at an estimated 202% in
2017, well above the 50% level seen in most of Turkey's
emerging market peers. The depreciation has exacerbated the corporate
sector's already large foreign currency debt service costs at a
time when profitability is being squeezed by high inflation and rising
interest rates. With a sizeable share of banking system loans denominated
in foreign currency, domestic banks' asset quality is also
under pressure, although the banks' capital buffers remain
relatively healthy.
RATIONALE FOR AFFIRMING TURKEY'S Ba1 ISSUER RATING
In all of these respects, the pressures on Turkey's credit
profile have risen since the last rating action. However,
the sovereign retains some important credit strengths that mitigate these
pressures and that continue to support a Ba1 rating.
Turkey's key strengths include its large size and its flexible,
middle-income economy, which benefits from favorable demographics,
specifically its relatively young population, and diverse trade
linkages. These factors continue to support a potential growth
rate of about 3.3%, according to the IMF. The
government's fiscal deficit, debt and debt affordability metrics
remain materially stronger than most similarly-rated peers.
Furthermore, as a result of a proactive debt-management strategy,
debt maturities have been lengthened and debt is largely issued at fixed
rates. This structure has helped to soften the pass-through
of the lira weakness to the government's debt metrics and debt affordability.
WHAT COULD CHANGE THE RATING UP/DOWN
Potential upward movement in Turkey's issuer rating is constrained by
balance-of-payments pressures as long as external imbalances
and refinancing requirements 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 domestic political environment,
while credit positive, would not result in upward rating actions
in the absence of sustainable improvements in external vulnerability although
such developments could lead to a stabilization of the rating outlook.
Turkey's sovereign rating would likely be downgraded if there is a material
increase in the probability of a balance of payments crisis. Such
an event would likely be associated with some combination of a rapidly
falling exchange rate, a sharp further reduction in reserves or
sustained capital outflows. Sustained lower growth and a related
worsening in the government's fiscal strength could also precipitate a
downgrade, as could a further erosion of institutional strength.
GDP per capita (PPP basis, US$): 20,420 (2015
Actual) (also known as Per Capita Income)
Real GDP growth (% change): 2% (2016 Estimate) (also
known as GDP Growth)
Inflation Rate (CPI, % change Dec/Dec): 8.5%
(2016 Actual)
Gen. Gov. Financial Balance/GDP: -1.2%
(2016 Estimate) (also known as Fiscal Balance)
Current Account Balance/GDP: -3.8% (2016 Actual)
(also known as External Balance)
External debt/GDP: 49.8% (2016 Estimate)
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 14 March 2017, 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, are weakening. The issuer's fiscal
or financial strength, including its debt profile, has not
materially decreased. The issuer has become increasingly susceptible
to event risks.
The principal methodology used in these ratings was Sovereign Bond Ratings
published in December 2016. 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 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.
Kristin Lindow
Senior Vice President
Sovereign Risk Group
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653
Yves Lemay
MD - Sovereign Risk
Sovereign Risk Group
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454
Releasing Office:
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653
