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Rating Action:

Moody's upgrades Turkey's government bond ratings to Ba1, positive outlook

20 Jun 2012

London, 20 June 2012 -- Moody's Investors Service has today upgraded Turkey's government bond ratings by one notch to Ba1 from Ba2, and has maintained the positive outlook.

The key drivers for today's rating action are:

1. The significant improvement in Turkey's public finances and the resulting increased shock-absorption capacity of the government's balance sheet; and

2. Policy actions that have the potential to address external imbalances, such as the large current account deficit, which is the largest credit risk facing the country.

Moody's decision to maintain the positive outlook on Turkey's ratings reflects the rating agency's expectation that both of the drivers that led to today's rating upgrade will continue to improve the country's fiscal and macroeconomic resilience. Looking ahead, an upgrade to an investment-grade rating will probably be dependent on Turkey becoming more resilient to balance-of-payment shocks, given the already favourable public-finance metrics.

RATINGS RATIONALE

The first driver underlying Moody's decision to upgrade Turkey's sovereign rating is the increased resilience of Turkey's public finances. Although the international economic environment has become more challenging and Turkish domestic growth is slowing down, the country's ongoing efforts to reduce its debt burden are unlikely to be significantly affected. Moody's notes that the relatively minor and short-lived deterioration in Turkey's public finances after the 2008-09 financial crisis gives some cause for optimism. Moreover, the deficit reduction and primary surpluses that the Turkish government has recorded over the past two years are largely due to expenditure restraint than revenue increases, despite the booming economic growth of the past two years. In fact, since 2009, Turkey's general government expenditure as a percentage of GDP has fallen from 40.1% to 37.4%, whereas general government revenues have risen from 34.2% to 36.1%. Even in Moody's adverse scenario, which includes more pessimistic outcomes (relative to our forecasts) for nominal GDP growth, the primary balance and interest costs, the rating agency assumes only a slight decline over a two-year time horizon for Turkey's debt burden (both general government debt as a percentage of GDP and the debt affordability ratio). In fact, Turkey's general government debt level of 39.4% in 2011 was much lower than the Ba1 median of 54.6% and more in line with the Baa3 median of 38.5%.

The second driver for today's upgrade is a set of policies that the Turkish government has been pursuing with the aim of addressing the root causes of the country's external vulnerabilities, such as the high import content of its exports, the low savings rate and its modest level of foreign-exchange reserves. In April 2012, the government announced a new investment incentive scheme that uses tax breaks and interest-rate subsidies to encourage greater domestic production of intermediate goods in key sectors such as energy, automotives and mining. The scheme has the potential to not only reduce the need for Turkish exporters to import these types of goods, but to also increase foreign direct investment inflows into these sectors, and thus provide a much more stable source of current-account financing. The government has also taken action to address the private-sector savings shortfalls with the passage of legislation on 13 June 2012 that increases the incentives for individuals to invest in personal pension schemes. While their impact will take time to materialise, policies like these should help to address over time the root causes of Turkey's weak domestic savings rate, which currently renders the country vulnerable to swings in risk perception among foreign-bank lenders and institutional investors. For example, Turkey's 2011 external vulnerability indicator (EVI), which is the ratio of external debt payments to official foreign-exchange reserves, was 173.8, as compared to a Ba1 median of 66.2 and a Baa3 median of 55.8. Looking ahead, some of Turkey's external vulnerabilities, such as the current account deficit, are now starting to become less pronounced. Moreover, Turkey's real external vulnerabilities situation may be more favourable than the headline data suggest, as indicated by the net errors and omissions position in its balance of payments.

Although not a specific driver of today's rating action, Turkey's current Ba1 rating level is also underpinned by the country's considerable economic strengths, such as its size and dynamism. The country's diversification is also an important strength, especially since it has reduced its trade dependence on the European Union in recent years -- a development that should provide the country with some additional shock-absorption capacity should macroeconomic stress in the euro area intensify further. Turkey's creditworthiness is also supported by a well-capitalised banking sector.

WHAT COULD MOVE THE RATING UP/DOWN

Turkey has considerable economic strengths, such as its size, dynamism and its economic influence in both Europe and the Middle East. As mentioned above, the government's financial strength is also an advantage for the country. However, a prerequisite for Turkey attaining an investment-grade rating is a greater resilience to balance-of-payment shocks, such as a sharp decline in capital inflows into Turkey from foreign-bank lenders and/or institutional investors. Moody's would also consider upgrading Turkey's rating if the government made further progress in lowering its external vulnerabilities by structurally reducing its current account deficit, increasing foreign-exchange reserves, or reducing the private sector's external borrowing.

Turkey's currently positive outlook on its sovereign bond rating would likely be moved to stable if progress on addressing external vulnerabilities were to be reversed. A material deterioration in the government's public-finance metrics would also result in downward movement in the outlook or, in extremis, the rating itself. Although not likely given the country's improved resilience, Moody's believes that a sudden and sustained stop in foreign capital flows would exert downward pressure on the ratings.

COUNTRY CEILINGS

As part of today's rating actions, Moody's has adjusted Turkey's long-term foreign-currency bond ceiling to Baa2 from Ba1, its short-term foreign-currency bond ceiling has been changed to Prime-2 from Not-Prime, its long-term foreign-currency deposit ceiling has been raised to Ba2 from Ba3. The rating agency has also adjusted Turkey's local-currency bond and deposit ceilings to A3 from A2 to better capture the country's system risk and the default correlation between the government and private-sector borrowers.

The principal methodology used in these ratings was Sovereign Bond Ratings published in September 2008. Please see the Credit Policy page on www.moodys.com for a copy of this methodology.

REGULATORY DISCLOSURES

For ratings issued on a program, series or category/class of debt, this announcement provides relevant 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 relevant regulatory disclosures in relation to the rating action on the support provider and in relation to each particular rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides relevant 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.

The ratings have been disclosed to the rated entities or their designated agent(s) and issued with no amendment resulting from that disclosure.

Information sources used to prepare each of the ratings are the following: parties involved in the ratings, parties not involved in the ratings, and public information.

Moody's considers the quality of information available on the rated entities, obligations or credits satisfactory for the purposes of issuing these ratings.

Moody's adopts all necessary measures so that the information it uses in assigning the ratings is of sufficient quality and from sources Moody's considers to be reliable including, when appropriate, independent third-party sources. However, Moody's is not an auditor and cannot in every instance independently verify or validate information received in the rating process.

Moody's Investors Service may have provided Ancillary or Other Permissible Service(s) to the rated entities or their related third parties within the two years preceding the credit rating action. Please see the special report "Ancillary or other permissible services provided to entities rated by MIS's EU credit rating agencies" on the ratings disclosure page on our website www.moodys.com for further information.

Please see the ratings disclosure page on www.moodys.com for general disclosure on potential conflicts of interests.

Please see the ratings disclosure page on www.moodys.com for information on (A) MCO's major shareholders (above 5%) and for (B) further information regarding certain affiliations that may exist between directors of MCO and rated entities as well as (C) the names of entities that hold ratings from MIS that have also publicly reported to the SEC an ownership interest in MCO of more than 5%. A member of the board of directors of this rated entity may also be a member of the board of directors of a shareholder of Moody's Corporation; however, Moody's has not independently verified this matter.

Please see Moody's Rating Symbols and Definitions on the Rating Process page on www.moodys.com for further information on the meaning of each rating category and the definition of default and recovery.

Please see ratings tab on the issuer/entity page on www.moodys.com for the last rating action and the rating history.

The date on which some ratings were first released goes back to a time before Moody's ratings were fully digitized and accurate data may not be available. Consequently, Moody's provides a date that it believes is the most reliable and accurate based on the information that is available to it. Please see the ratings disclosure page on our website www.moodys.com for further information.

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.

Sarah Carlson
Vice President - Senior Analyst
Sovereign Risk Group
Moody's Investors Service Ltd.
One Canada Square
Canary Wharf
London E14 5FA
United Kingdom
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454

Bart Oosterveld
MD - Sovereign Risk
Sovereign Risk Group
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

Releasing Office:
Moody's Investors Service Ltd.
One Canada Square
Canary Wharf
London E14 5FA
United Kingdom
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454

Moody's upgrades Turkey's government bond ratings to Ba1, positive outlook
No Related Data.
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