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Rating Action:

Moody's downgrades Turkey's ratings to Ba3 and assigns negative outlook

17 Aug 2018

New York, August 17, 2018 -- Moody's Investors Service ("Moody's") has today downgraded the Government of Turkey's long-term issuer ratings to Ba3 from Ba2 and changed its rating outlook to negative, concluding the review for downgrade that was initiated on 1 June 2018. The senior unsecured bond ratings and senior unsecured shelf ratings have also been downgraded to Ba3 and (P)Ba3 respectively.

Concurrently, Moody's has downgraded to Ba3 from Ba2 the senior unsecured bond rating 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 changed its rating outlook to negative.

The key driver for today's downgrade is the continuing weakening of Turkey's public institutions and the related reduction in the predictability of Turkish policy making. That weakening is exemplified by heightened concerns over the independence of the central bank, and by the lack of a clear and credible plan to address the underlying causes of the recent financial distress, notwithstanding recent statements by the government. The tighter financial conditions and weaker exchange rate, associated with high and rising external financing risks, are likely to fuel inflation further and undermine growth, and the risk of a balance of payments crisis continues to rise.

In a related decision, Moody's lowered Turkey's long-term country ceilings: the foreign currency bond ceiling to Ba2 from Baa3; its foreign currency deposit ceiling to B1 from Ba3; and its local currency bond and deposit ceilings to Ba1 from Baa2. The short-term foreign currency bond ceiling was also lowered to Not Prime (NP) from Prime-3 (P-3) and the short-term foreign currency deposit ceiling remains 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 decision to narrow the gap between the ceilings and the government bond rating is informed by Moody's view of weakening institutional strength.

RATINGS RATIONALE

RATIONALE FOR THE DOWNGRADE TO Ba3

The key driver for today's rating downgrade is the further weakening of Turkey's public institutions and the related reduction in the predictability of Turkish policy making. When Moody's placed Turkey's Ba2 rating on review for downgrade on 1 June, the rating agency stated that the outcome of the review would mainly rest on the coherence and predictability of the policies pursued by the government and the extent to which the policy framework would restore adequate financing of Turkey's large external borrowing requirements.

Since then, financial stress has increased further, most visibly in the sharp depreciation of the Turkish Lira, which has now lost close to 40% of its value against the US dollar since the start of the year. Consumer price inflation has reached 15.85% in July, up by more than five percentage points since the start of the year and the highest inflation rate since December 2003. Domestic funding conditions have deteriorated with bond yields on the government's domestic securities reaching above 20% in mid-August. While Turkish banks have so far managed to maintain access to the international inter-bank markets for funding, the tightening financing conditions and the weakening Lira will further increase pressure on domestic borrowers with foreign-currency debt.

Moody's view of a further decline in the predictability and effectiveness of economic policy making is exemplified by concerns over the central bank's independence. This particularly follows the centralization of powers at the presidency level following the elections in June with the president now having the sole responsibility for appointing the central bank governor, deputy governor and other members of the country's Monetary Policy Committee. Since the elections, the central bank has refrained from raising policy rates despite significantly increasing its inflation forecasts for this year and next. The discrepancy between the central bank's inflation forecasts and targets and its unwillingness to pursue an appropriate policy to achieve those targets further undermines the central bank's credibility. While it has provided some breathing space to the domestic banks by lowering their reserve requirements, in Moody's view this is a short-term measure that does not address the underlying pressures the banking sector faces, nor does it address the mounting inflationary pressures.

Similarly, Moody's considers that the lack of or delays in formulating a comprehensive and effective economic plan to address the underlying causes of the recent financial stress is a clear indication for declining policy predictability and effectiveness. The government has outlined the broad objectives of its medium-term economic plan, including its intention to gradually slow down the over-heating economy by tightening fiscal policy, and bringing inflation back to single-digit rates. However, so far these objectives have not been underpinned by detailed measures with clear timelines of implementation. Turkey's external funding needs remain significant, and the risk of a balance of payments crisis continues to rise.

RATIONALE FOR ASSIGNING NEGATIVE OUTLOOK

In Moody's view, the probability that the Turkish authorities will manage to engineer a "soft landing" of the economy is declining in the context of weakened institutions and increasing tensions with the US. Therefore, the risk of continued financial stress is significant, with potentially further negative implications for Turkish banks and corporates that have large external funding needs. Such a negative scenario would further increase the risk of a prolonged period of accute economic and financial volatility, which ultimately would weigh further on the credit risk profile of the government.

Against these significant credit risks, Moody's will continue to balance the inherent credit strengths of the country, including a large and diversified economy and a still relatively strong fiscal position. The government's debt burden remains moderate by global standards. Moody's also notes that Turkey has successfully managed previous serious economic and financial shocks.

WHAT COULD CHANGE THE RATING DOWN/UP

Moody's would likely downgrade Turkey's rating if the currency crisis deepened further and the country proved unable to pursue a combination of fiscal and monetary policies that would be effective in easing external funding pressures and in engineering a rebalancing of the economy that would ease inflationary pressures and position the country on a sustainable growth path.

Given the negative outlook, a positive rating action is currently highly unlikely. The rating could be stabilized if the Turkish authorities presented a coherent and effective economic plan in the near term that involves a material fiscal and monetary policy tightening to induce an orderly slowdown of the economy, leading in turn to lower inflation and inflation expectations as well as a reduction in the size of the current account deficit. Significant external financial support would likely act as a supportive factor to the rating.

The conditions which led to today's actions also weigh on the country's structured finance transactions, financial and non-financial corporates and sub-sovereign entities. The reviews on impacted domestic issuers, which started in June 2018, are still ongoing. In addition to assessing the impact of the sovereign action and ceiling changes on these issuers, as part of these reviews, Moody's is analyzing their exposure to the prevalent refinancing environment, as well as to its expectation of challenging economic conditions in the country, and potential further volatility in the financial markets. The rating conclusions of those reviews will be communicated to the market separately once these various credit aspects have been fully analyzed.

NATIONAL SCALE RATINGS

Moody's Investors Service has today also published an update to the National Scale Ratings (NSR) map for Turkey in conjunction with 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 found in "National Scale Rating Maps by Country", published on 17 August 2018.

GDP per capita (PPP basis, US$): 26,893 (2017 Actual) (also known as Per Capita Income)

Real GDP growth (% change): 7.4% (2017 Actual) (also known as GDP Growth)

Inflation Rate (CPI, % change Dec/Dec): 11.9% (2017 Actual)

Gen. Gov. Financial Balance/GDP: -2.6% (2017 Actual) (also known as Fiscal Balance)

Current Account Balance/GDP: -5.6% (2017 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 15 August 2018, 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 not materially changed. 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: 1 212 553 0376
Client Service: 1 212 553 1653

Yves Lemay
MD - Sovereign Risk
Sovereign Risk Group
JOURNALISTS: 44 20 7772 5456
Client Service: 44 20 7772 5454

Releasing Office:
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653

No Related Data.
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