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Rating Action:

Moody's places Turkey's Ba2 ratings on review for downgrade

01 Jun 2018

New York, June 01, 2018 -- Moody's Investors Service (MIS) has today placed the government of Turkey's Ba2 long-term issuer ratings, the Ba2 senior unsecured bond ratings and (P)Ba2 senior unsecured shelf ratings on review for downgrade. Concurrently, Moody's has placed on review for downgrade the Ba2 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.

Moody's decision to place the current rating under review reflects mounting uncertainty regarding the future direction of macroeconomic policy, in the context of the country's already vulnerable external position, that will, if sustained, raise the risk of severe pressures on Turkey's balance of payments to a level that is no longer consistent with the current rating.

Turkey's long-term country ceilings are not affected by today's announcement. The foreign currency bond ceiling remains at Baa3; its foreign currency bank deposit ceiling remains at Ba3 and its local currency country ceilings for bonds and bank deposits remain at Baa2. The short-term country ceilings also remain unchanged at Prime-3 (P-3) for foreign currency bonds and Not Prime (NP) for foreign currency bank deposits.

RATINGS RATIONALE

DRIVER FOR THE DECISION TO PLACE TURKEY'S Ba2 RATING ON REVIEW FOR DOWNGRADE

On 7 March 2018, Moody's downgraded Turkey's ratings by one notch to Ba2 from Ba1. At that time, the rating agency stated that Turkey's sovereign rating would likely be downgraded further if there was a material increase in the probability and proximity of severe pressures on the country's balance of payments, relative to what is implied by the Ba2 rating.

Today's decision to place Turkey's Ba2 rating on review for downgrade is driven by Moody's expectation that the recent erosion in investor confidence in Turkey will continue if not addressed through credible policy actions following the June elections, leading to a sustained increase in the probability and proximity of severe balance of payments constraints. The erosion of confidence was triggered in part by the advancement of presidential and parliamentary elections to 24 June, 17 months ahead of schedule. That decision exacerbated existing investor concerns regarding the negative credit impact of the economic, fiscal and monetary policy settings, and heightened concerns that the next administration would move further down the path of policy options detrimental to economic and financial stability.

The increase in the country's external vulnerability resulting from that confidence shock can be seen in a number of indicators. Most visibly, the Turkish lira has depreciated by roughly 20% in the past three months. The current account deficit has widened to an estimated 6.5% of GDP on a twelve-month rolling basis as of the end of the first quarter and reserves have dropped further since their recent peak in October 2017 due to seasonally high debt repayments in recent months. In March alone, the $4.7 billion outflow of central bank foreign exchange reserves roughly matched the $4.8 billion current account deficit. In the same month, the roll-over ratio for banks' long-term external funding fell to only 64%, compared to 88% for the whole quarter. Also since then, the cost of bank funding has risen sharply.

The negative shift in investor sentiment is a significant challenge for a country that is deeply dependent on net capital inflows to finance annual gross external borrowing requirements in excess of $200 billion, reflecting the large current account deficit and sizeable short-term debt and maturing long-term debt maturities. The country's reserves are already low -- the central bank's foreign exchange reserves (including gold) cover less than half that amount. Even if the current account deficit narrows in the second half of the year due to the impact of the weaker lira and a slowdown in domestic demand, the deficit will remain large in absolute and relative terms.

The authorities have made limited progress in addressing Turkey's structural economic problems, most notably its structural external deficits, in recent years. The period since the failed coup in 2016 has seen increasingly expansionary fiscal policy that has stimulated growth to unsustainable levels. Longer term economic reforms intended to raise potential growth and to reduce external vulnerabilities to a large extent have been sidelined, given the political focus on the several election cycles the country experienced in recent years.

Most recently, although not for the first time, the focus has been on monetary policy. For a number of years, the credibility of Turkey's policy institutions has been undermined by the ineffectiveness of monetary policy, in part reflecting political interference in the policy-making process. The 5% (±2%) inflation target is regularly exceeded -- inflation is currently in double digits and will probably rise given the falling exchange rate. The President's recent suggestion that monetary policy would be loosened rather than tightened if he is re-elected further aggravated the lira's weakness, which did not subside despite an emergency 300 bps hike in the Late Liquidity Window (LLW) interest rate by the central bank on 23 May.

The central bank had to take additional steps in the subsequent days to take the pressure off the lira, which culminated in the credit-positive simplification of the monetary policy regime to take effect on 1 June, a reform that had been pledged in the past but never implemented. The latter move involved more than doubling the various policy rates that had gone unused for more than a year and also included another hike in the LLW rate to 19.5%. The bank will now return to using the one-week repo rate, which it hiked from 8% to 16.5%, as its main policy rate, around which it established a ±150 bps corridor. The currency firmed marginally on the news, with market attention still focused on the next MPC meeting on 7 June.

Turkey has seen, and has managed, serious economic and financial shocks before. These circumstances partly reflect fundamental credit strengths derived from a large and diversified economy and a still relatively strong fiscal position. At present, the fact that economic and financial vulnerabilities are rising in parallel with an increasingly unpredictable political situation and rising global interest rates heightens the threat. The outcome will mainly rest on the coherence and predictability of the policies that are pursued after the upcoming elections and beyond and the extent to which an improved policy framework will restore adequate financing and refinancing of Turkey's large external borrowing requirements.

Moody's will therefore use the review period to gain a better understanding of the likely policy direction post-election, and the extent to which it is likely to weaken or support domestic economic and financial stability. Moody's will also use the review period to monitor indicators of stress and assess their implications for Turkey's resilience to shocks and the country's balance of payments position. Finally, the agency will seek to understand the policy-formulation process, given that after the elections the person elected president will have significant authority over the legislative and judicial branches of government, and could potentially also exert greater influence over the legally independent central bank.

WHAT COULD CHANGE THE RATING DOWN/UP

Moody's would likely downgrade Turkey's ratings if it concludes that policymaking is unlikely to be able to prevent further deterioration in Turkey's external position, leading to a sustained rise in the risk of a balance of payments crisis. Moody's might reach that conclusion either because it determined that monetary, financial or economic policies are likely to undermine financial stability and sustainable growth; or because it concluded that, in the absence of clarity as to future policies, the risk of a further rise in refinancing risk and damaging capital flight remains high.

Given the review for downgrade, an upgrade is highly unlikely in the near future. Moody's would consider confirming the current Ba2 rating if it were to conclude that the country would likely be able to strengthen its ability to meet its large external funding requirements by pursuing credible macroeconomic policies supportive of financial stability and sustainable growth within an adequately transparent and predictable policy-making environment.

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: 47.3% (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 30 May 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 economic fundamentals, including its economic strength, have not materially changed. The issuer's fiscal or financial strength, including its debt profile, has not materially changed. The issuer has become increasingly susceptible to event risks, in particular external vulnerability 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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