New York, March 07, 2018-- Moody's Investors Service (MIS) has today downgraded the Government of Turkey's
long-term issuer and senior unsecured debt ratings to Ba2 from
Ba1 and its senior unsecured shelf rating to (P)Ba2 from (P)Ba1.
The rating outlook has been changed to stable from negative. Moody's
also downgraded the long-term senior unsecured debt rating of Hazine
Mustesarligi Varlik Kiralama A.S. to Ba2 from Ba1,
a special purpose vehicle wholly owned by the Republic of Turkey from
which the Treasury issues sukuk lease certificates, and changed
its rating outlook to stable from negative.
RATINGS RATIONALE
The downgrade of Turkey's government rating to Ba2 from Ba1 is driven
by two key developments that Moody's identified as triggers for
a downgrade when it assigned a negative outlook on the rating last year:
1) The continued loss of institutional strength, as evidenced by
further erosion in the effectiveness of monetary policy and further delays
in implementing core structural economic reforms.
2) The increased risk of an external shock crystallizing given the country's
wide current account deficits, higher external debt and associated
large rollover requirements in the context of heightened political risks
and rising global interest rates.
The rationale for assigning a stable outlook to the rating is that a Ba2
rating appropriately captures the further erosion of Turkey's institutional
strength and its increased susceptibility to event risks, balanced
against the country's economic and fiscal strengths, mainly
its large and dynamic economy and favorable government debt metrics.
In a related decision, Moody's lowered Turkey's long-term
country ceilings: the foreign currency bond ceiling to Baa3 from
Baa2; its foreign currency bank deposit ceiling to Ba3 from Ba2 and
its local currency country ceilings for bonds and bank deposits to Baa2
from Baa1. The short-term country ceilings remain unchanged
at Prime-3 (P-3) for foreign currency bonds and Not Prime
(NP) for foreign currency bank deposits.
FIRST DRIVER: CONTINUING EROSION OF INSTITUTIONAL STRENGTH
The ongoing weakening of Turkey's credit profile continues to be
primarily driven, as it has over the past four years, by the
deterioration in the country's institutional strength. The
government appears still to be focused on short-term measures,
to the detriment of effective monetary policy and of fundamental economic
reform.
Faltering institutional strength is reflected in a broad range of adverse
outcomes on the economic, financial and political front despite
strong near-term growth rates and healthy public finances.
Inflation has stayed stubbornly in the double digits -- the highest
inflation rates seen in nine years. It is unlikely to fall to single
digits on a sustained basis until 2020 at the earliest. Both the
2018-20 Medium Term Program as well as the 11th 5-year National
Development Plan, which will start next year, assume average
inflation consistently above the central bank's medium-term
inflation target of 5%. The explicit tolerance of high inflation
in these plans demonstrates the priority accorded to short-term
growth regardless, it appears, of the medium-term consequences.
The erosion of Turkey's executive institutions has continued with
the government's ongoing activities to remove suspected sympathizers
with the Gülen movement blamed for 2016's coup attempt and
the ongoing state of emergency. The undermining of the authority
of the judiciary is illustrated by the government's refusal to honor
a Constitutional Court ruling to release certain political prisoners,
and a lower court later sentenced the prisoners to life terms in prison.
Deep divisions in Turkish society were evident in the campaign before
the referendum on the constitutional amendments last April and the vote
itself. Those amendments -- which will eliminate the office
of the prime minister and very significantly expand the authority of the
president when they become effective next year, with limited checks
and balances -- are likely to undermine the predictability and therefore
the effectiveness of policymaking.
Moreover, while the authorities have registered some successes on
the structural reform front, such as auto-enrollment in company-run
pension plans, legislation to restrict foreign currency lending
to companies and the recent submission of a draft value-added tax
reform to parliament, progress has been slow to date. Government
officials continue to postpone the implementation of more comprehensive
structural reforms, such as to address rigidities in the labor market,
in advance of the 2019 elections. As a consequence, while
growth has exceeded expectations in recent months, medium-term
growth expectations remain below historical experience and imbalances
are growing, as evidenced by the large current account deficit and
double-digit inflation. While the fiscal deficit and the
government's debt burden remain contained in the near-term,
the willingness to support short-term growth through fiscal stimulus
rather than through more sustainable economic reform signals future fiscal
challenges. And, although the unemployment rate has dropped
since 2016, it remains high at about 10%, with the
jobless rate among youth twice as high.
SECOND DRIVER: INCREASED RISK OF EXTERNAL SHOCK DUE TO HIGH EXTERNAL
DEBT AND POLITICAL RISKS
Set against the negative institutional backdrop, Turkey's
external position, debt and rollover needs have continued to worsen.
Although the government's own external borrowing needs are relatively
low, the country as a whole has very large external financing needs
given sizeable current account deficits, maturing long-term
debt and high levels of short-term debt. This external exposure
has continued to grow over the past year and is expected to continue to
do so. The country's foreign exchange buffers are very low
compared to these needs; the country's External Vulnerability
Indicator is expected to rise to well over 200%, which is
extremely high in comparison to Turkey's rating peers, and
signals an ever-rising exposure to changes in international investor
sentiment.
The potential triggers of a re-evaluation of Turkish country risk
by foreign investors continue to multiply with the continuing deterioration
of Turkey's geopolitical situation, its already strained domestic
politics and the prospects of monetary policy tightening in the more developed
economies. Amplifying its vulnerability to external shock are Turkey's
political risks, with the convergence of risks from the geopolitical
arena and domestic politics. On the domestic front, as described
above, the government's legal crackdown since the failed coup in
July 2016 has taken a negative toll on the investment climate and relations
between Turkey and the US and EU.
In Moody's view, the geopolitical risk arising from Turkey's
recent engagement in Syria becomes more marked the longer and deeper the
engagement goes on. Turkey's involvement in the Syrian conflict
and battle against ISIS spilled over into heightened domestic terrorism
in recent years, which has been damaging to tourism and hence economic
stability (tourism being an important source of export revenues) and confidence.
While tourism is now reviving strongly, the full normalization of
the sector remains vulnerable to political and security risks.
This overall picture suggests that the possibility of a sudden,
disruptive reversal in foreign capital inflows, a more rapid fall
in already inadequate FX reserves and, in a worst-case scenario,
a balance of payments crisis, while still quite low, has increased
beyond Moody's expectations a year ago. The larger the external
indebtedness becomes, the less comfort can be taken from the country's
historical ability to attract large amounts of foreign capital,
and the greater the exposure to shifts in investor sentiment due to political
risks or global monetary tightening. Such shifts could also worsen
the quality and shorten the maturity of such capital inflows, a
trend already witnessed in 2017.
RATIONALE FOR THE STABLE OUTLOOK
The rationale for assigning a stable outlook to the rating is that the
Ba2 rating appropriately balances the further erosion of Turkey's
institutional strength and its increased susceptibility to event risks
discussed above, against the country's economic and fiscal
strengths stemming from its large and robust economy and favorable government
debt metrics. Turkey's economy is highly dynamic, although
last year's growth was well above the pace expected in 2018-19.
Moody's now believes that Turkey's potential growth rate is
around 3.5%-4%, although this is below
the government's estimate of 5% or more.
Fiscal strength, as illustrated by the debt and debt affordability
metrics, remains favorable relative to many peers, with a
general government gross debt to GDP ratio estimated at about 28%
at end-2017 compared to the median of about 46% for Ba-rated
peers. Although central government spending increased rapidly last
year thanks to the fiscal stimulus, revenue also increased in line
with the fast growth in nominal GDP, so the deficit came in below
the government's forecasts both nominally and as a share of GDP.
Moody's anticipates a somewhat bigger deficit this year and next
but given the expected increase in nominal GDP, the debt to GDP
ratio is not expected to deteriorate.
The growth of contingent liabilities outside of the budget, such
as the Public-Private Partnerships (PPPs) or the Credit Guarantee
Fund, is a reversal of reforms that were undertaken in the 2000s
after the 2001 financial crisis. Moody's considers that Turkey's
exposure to PPPs, its costs of military campaigns and its plans
for borrowing against the collateral of the Turkish Sovereign Wealth Fund
lack full transparency, but also that the related contingent liabilities
plus Treasury's explicit debt guarantees are relatively small and
manageable for now.
WHAT COULD CHANGE THE RATING UP/DOWN
Potential upward movement in Turkey's issuer rating is constrained
by its high external vulnerability. Upward rating pressure could
materialize in the event of structural reductions in these vulnerabilities,
i.e. a significant and sustained narrowing of the current
account deficit or an elongation of the banking and corporate sector's
external debt structure. Also important would be material improvements
in Turkey's institutional environment or productivity. Reductions
in political risk emanating either from the geopolitical or domestic political
environment, while credit positive, would not necessarily
result in upward rating actions in the absence of sustainable improvements
in external vulnerability.
Turkey's sovereign rating would likely be downgraded if there is
a material increase in the probability and proximity of a balance of payments
crisis relative to what is implied by the current Ba2 rating. Such
an event would likely be precipitated by a reduction in foreign exchange
reserves or prolonged capital outflows. Sustained lower growth
and a related worsening in the government's fiscal strength could
also precipitate downward rating pressure, as could a further erosion
of institutional strength and policy predictability.
GDP per capita (PPP basis, US$): 24,986 (2016
Actual) (also known as Per Capita Income)
Real GDP growth (% change): 3.2% (2016 Actual)
(also known as GDP Growth)
Inflation Rate (CPI, % change Dec/Dec): 8.5%
(2016 Actual)
Gen. Gov. Financial Balance/GDP: -1.7%
(2016 Actual) (also known as Fiscal Balance)
Current Account Balance/GDP: -3.8% (2016 Actual)
(also known as External Balance)
External debt/GDP: 46.9% (2016 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 02 March 2018, 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,
have 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.
UPDATE TO TURKEY'S NATIONAL SCALE RATINGS
Moody's Investors Service has today also published an updated 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 7 March 2018.
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
