Fitch: Turkey Risks Balanced; Policy, Adjustment Still in Focus

Thu May 1, 2014 9:58am EDT

(The following statement was released by the rating agency) LONDON, May 01 (Fitch) Turkey's willingness to take difficult policy decisions, such as the sharp hike in interest rates in January, and the economy's capacity for adjustment remain important elements of our ratings assessment, Fitch Ratings says. Overall, the risks to Turkey's sovereign credit profile remain broadly balanced as reflected in the Stable Outlook on Turkey's 'BBB-' rating which we affirmed last month. Tighter monetary policy has contributed to our lower growth forecasts of 2.5% for 2014 (revised down from 3.2%) and 3.2% for 2015 (from 3.8%), and our forecast that the current account deficit will narrow to 6.2% of GDP this year, from 8% in 2013. The government continues to target growth of 4%, although Deputy Prime Minister Ali Babacan said this week that while this was still attainable, domestic demand should be kept under control and the economic priority was to narrow the current account deficit. Turkey's current account constitutes a constraint on long-term growth, which has not yet been fully addressed. Previous instances of current account adjustment in Turkey prompted by deep falls in the real effective exchange rate have often proved unsustainable, with the deficit widening again once growth picks up, reflecting a pro-growth policy bias. If the government were successful in increasing exports and savings, and achieving a better mix of current account financing, in particular via higher foreign direct investment, it would help address these imbalances. At this juncture, Turkey continues to face a challenging external environment exacerbated by political risk and an appreciable gross external financing requirement. Portfolio and short-term capital inflows, the mainstay of current account financing, have slowed significantly since the Federal Reserve first mooted a reduction in asset purchases a year ago. However, there has been no 'sudden stop' of capital and roll-over rates for corporates and banks remain high. Elevated political risk relative to peers has long been a feature of Turkey's sovereign rating. Anti-government protests in May 2013 and the political crisis in December/January this year showed how quickly political instability can impact on perceptions of sovereign creditworthiness. The capacity for political risk to impact adversely on government effectiveness and policy predictability is a rating sensitivity. Turkey's sovereign credit profile and economic and fiscal outlook were among the issues discussed at Wednesday's event "Turkey: Tough Times" held in our London office. The Turkish banking and insurance systems, and the outlook for Turkish corporates, were also discussed. Presentations can be seen at www.fitchratings.com, where video interviews with the relevant analysts will also be available in the coming days. Contact: Paul Rawkins Senior Director Sovereigns +44 20 3530 1046 Fitch Ratings Ltd 30 North Colonnade London E14 5GN Mark Brown Senior Director Fitch Wire +44 20 3530 1588 Media Relations: Peter Fitzpatrick, London, Tel: +44 20 3530 1103, Email: peter.fitzpatrick@fitchratings.com. The above article originally appeared as a post on the Fitch Wire credit market commentary page. The original article can be accessed at www.fitchratings.com. All opinions expressed are those of Fitch Ratings. Applicable Criteria and Related Research: Turkey here ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: here. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF THIS SITE. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE.

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