Paris, June 14, 2019 -- Moody's Investors Service ("Moody's") has today
downgraded the Government of Turkey's long-term issuer ratings
to B1 from Ba3 and has maintained the negative outlook. The senior
unsecured bond ratings and senior unsecured shelf ratings have also been
downgraded to B1 and (P)B1 respectively from Ba3/(P)Ba3.
Concurrently, Moody's has downgraded to B1 from Ba3 the backed
senior unsecured bond ratings of Hazine Mustesarligi Varlik Kiralama A.S.,
a special purpose vehicle wholly owned by the Republic of Turkey from
which the Turkish Treasury issues sukuk lease certificates, and
has maintained the negative outlook.
Today's downgrade reflects Moody's view that the risk of a
balance of payments crisis continues to rise, and with it the risk
of a government default. The B1 rating balances these risks against
the country's fundamental credit strengths, particularly its
large, diversified economy and still-moderate levels of government
indebtedness.
In a related decision, Moody's lowered Turkey's long-term
country ceilings: the foreign currency bond ceiling to B1 from Ba2;
its foreign currency deposit ceiling to B3 from B2; and its local
currency bond and deposit ceilings to Ba2 from Ba1. The short-term
foreign currency bond ceiling and short-term foreign currency deposit
ceiling remain 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 decision to align 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
The impact of the continued erosion in institutional strength and policy
effectiveness on investor confidence is increasingly outweighing Turkey's
traditional credit strengths including its large, diverse economy
and the low level of government debt. Turkey is structurally highly
reliant on external capital flows, and Moody's confidence
in its ability to continue to attract the large sums needed each year
to repay debt and sustain growth is waning. It remains highly vulnerable
to a further prolonged period of acute economic and financial volatility.
Foreign exchange reserve buffers are weak and Moody's expects them
to weaken further over the next two years relative to economy-wide
short-term liabilities. While policy announcements have
been made, the political authorities have yet to implement a plan
that would allow the economy to adjust to a new, more sustainable
equilibrium due to the negative short-term economic impact that
this adjustment would entail.
The government's willingness or ability to implement policies that
will sustain external investor confidence in the economy and financial
system by addressing underlying weaknesses remains uncertain. Since
mid-2018, the government has announced a number of economic
reform packages. Ultimately, these announcements have been
either reactive to particular pressures on the economy or a restatement
of measures that would be credit positive if implemented, but have
been discussed for years, and where little concrete has been done
to execute on these policy aspirations. Most government measures,
including those targeting the banking system, continue to be focused
on the near-term priority of propping up economic activity at the
expense of eroding the underlying resilience of the economy and its banking
system to external shocks, in part by increasing its fragility to
shifts in market sentiment.
The longer that remains the case, the more the weakness implied
by Turkey's very high reliance on external capital across all sectors
of the economy comes to dominate Moody's analysis; and the
greater the risk of further externally-sourced shocks involving
further capital outflows, loss of reserves, weakening in the
exchange rate, rises in inflation and severe damage to medium-term
growth. As a result, Moody's believes that the country's
vulnerability to an acute and highly disruptive balance of payment crisis
that ultimately would significantly constrain the capacity and perhaps
the willingness of the government to service its debt is now more aligned
to a single B rating, despite its still moderate debt burden relative
to similarly-rated peers.
Turkey is indeed once again facing intermittent currency crises after
a period of relative calm that lasted from late September 2018 through
February 2019. In consequence, both gross and net reserves
have fallen since February, with the decline in net reserves being
particularly pronounced. Gross and net reserve levels have been
structurally weak for many years, but this decline contributes to
a significant increase in external vulnerability for the country.
In 2019, Moody's expects that short-term external debt
repayments, currently maturing long-term external debt,
and total non-resident deposits will total more than 2.6
times the level of FX reserves. Moreover, funding costs have
risen rapidly, with yields up by around 400 basis points since February.
The fall in FX reserves seems contrary to the central bank's longstanding
policy to allow the exchange rate to float freely, and raises further
concerns about the transparency and independence of the central bank and,
by extension, Turkey's broader institutional framework.
External pressures are exacerbated by the ongoing disagreement between
Turkey and the United States, this time relating to Turkey's
purchase of the S-400 missile system from Russia. The sanctions
which the US Congress will consider if the purchase goes ahead,
while largely undefined to date, cast a further shadow over Turkey's
economy and financial system.
RATIONALE FOR THE NEGATIVE OUTLOOK
The balance of risk is firmly tilted to the downside. The risk
of an acute balance of payments crisis remains relatively low in the very
near term, consistent for now with the highest rating level in the
single-B rating category. However, weakening external
buffers point to this being an unstable equilibrium, and the more
time passes the more the government's ability to steer the economy
away from a more credit-negative path of a balance of payments
crisis is diminished. This, in turn, increases the
probability of more credit negative outcomes involving the need for capital
controls, restrictions on access to foreign currency and (sanctions
permitting) external support.
There are a number of possible near-term drivers for further instability.
In Moody's view, the re-run of the Istanbul mayoral
election on 23 June 2019 creates potential for political unrest that could
trigger a further material decline in the value of the lira and a further
depletion of FX reserves. The imposition of sanctions on Turkey
could also lead to a further, highly credit negative, market
reaction. Moreover, depending on the sanctions imposed,
it could also raise doubts over Turkey's ability to access an IMF
programme, should one be needed in the future to avoid an escalation
of a balance of payments and economic crisis. Even if Moody's
does not currently expect that to be needed, the potential tension
between sanctions and external support could in itself further undermine
investor confidence in the credit.
WHAT COULD CHANGE THE RATING DOWN/UP
Moody's would likely downgrade Turkey's rating if it were
to become clear that avoiding a more credit-negative path was becoming
increasingly unlikely, perhaps because of the currency crisis deepening
further. Any indication that capital controls were becoming more
likely or that Turkey's fiscal strength was deteriorating in a significant
way would be credit negative. A material deterioration in relations
with the US in the form of sanctions would also put downward pressure
on the rating due to the implications that might have for receiving IMF
assistance.
Given the negative outlook, upward rating movement is unlikely.
However, the rating could be stabilised if the authorities were
able to present and, crucially, implement a credible and broad-based
programme for addressing external pressures and engineering a rebalancing
of the economy. Significant external financial support, and
the policy agenda that would likely accompany it, would also be
supportive for the rating.
NATIONAL SCALE RATINGS
Moody's will shortly publish an update to its National Scale Rating
(NSR) map for Turkey to reflect the downgrade of the government's
long-term issuer rating. Moody's NSRs are ordinal
rankings of creditworthiness relative to other credits within a given
country, which offer enhanced credit differentiation among local
credits. NSRs are generated from Global Scale Ratings (GSRs) through
correspondences, or maps, specific to each country.
However, unlike GSRs, Moody's NSRs are not intended
to rank credits across multiple countries. Instead, they
provide a measure of relative creditworthiness within a single country.
The full maps can be accessed through the "Index of Current and
Superseded Compendia of National Scale Rating Maps by Country".
GDP per capita (PPP basis, US$): 27,956 (2018
Actual) (also known as Per Capita Income)
Real GDP growth (% change): 2.6% (2018 Actual)
(also known as GDP Growth)
Inflation Rate (CPI, % change Dec/Dec): 20.3%
(2018 Actual)
Gen. Gov. Financial Balance/GDP: -2.6%
(2018 Actual) (also known as Fiscal Balance)
Current Account Balance/GDP: -3.5% (2018 Actual)
(also known as External Balance)
External debt/GDP: [not available]
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 11 June 2019, a rating committee was called to discuss the rating
of the Government of Turkey. The main points raised during the
discussion were: The issuer's economic fundamentals, including
its economic strength, have not materially changed. The issuer's
institutional strength/framework, have materially decreased.
The issuer's fiscal or financial strength, including its debt profile,
has materially decreased. The issuer has become increasingly susceptible
to event risks.
The principal methodology used in these ratings was Sovereign Bond Ratings
published in November 2018. 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.
JOURNALISTS: 44 20 7772 5456
Client Service: 44 20 7772 5454
Yves Lemay
MD - Sovereign Risk
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
