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Fitch Affirms Turkey at 'BBB-'; Outlook Stable
April 4, 2014 / 4:05 AM / 4 years ago

Fitch Affirms Turkey at 'BBB-'; Outlook Stable

(The following statement was released by the rating agency) LONDON, April 03 (Fitch) Fitch Ratings has affirmed Turkey's Long-term foreign and local currency Issuer Default Ratings (IDRs) at 'BBB-' and 'BBB', respectively. The Outlooks are Stable. The issue ratings on Turkey's senior, unsecured foreign and local currency bonds have also been affirmed at 'BBB-' and 'BBB', respectively. The Country Ceiling has been affirmed at 'BBB' and the Short-term foreign currency IDR at 'F3'. KEY RATING DRIVERS Turkey suffered a renewed bout of investor unease in December-January as global risk aversion, stoked by uncertainty about the future direction of US monetary policy, collided with heightened domestic political and social tensions. These twin shocks put strong downward pressure on the Turkish lira, exposing finite limits to the Turkish authorities' ability to defend the currency while preserving international liquidity. In the event, the Central Bank (CBRT) bowed to market pressure on 28 January, raising interest rates by 425bp-550bp, taking the main policy rate to 10%. In taking this action, the CBRT reaffirmed Fitch's view that the authorities are prepared to adjust domestic policy settings to avert more disruptive shocks to economic stability. Turkey's complex monetary policy framework has also been simplified to a degree, while forward guidance indicates that policy will remain tight pending more favourable inflation outcomes. Consumer price inflation rose to 8.4% y-o-y in March from 7.9% in February. Macroeconomic policy management has improved over time, deflecting the risk of an economic 'hard landing' reminiscent of 2001 or 2009. However, the economy remains highly volatile and Fitch judges the coherence and predictability of macroeconomic policy to be weaker in Turkey than in some emerging market rating peers. Economic rebalancing, set in place by a previous round of policy tightening in 2011-12, came to a halt in 2H13 and the current account deficit rebounded to 8% of GDP for the year as a whole, four-fifths of which was funded by volatile portfolio and short-term capital inflows. By acknowledging the higher risk premium that investors have been demanding to hold Turkish financial assets, the authorities hope to reduce Turkey's vulnerability to short-term capital outflows and ease downward pressure on international reserves and the lira. Fitch considers that macroeconomic outcomes to date have been reassuring. The lira has stabilised and international reserves rebounded in February, following a steep fall in January. Domestically, industrial production and capacity utilisation remain strong, underpinned by exports, whereas domestic lending growth has slowed, and there are signs of a moderation in consumer and investor confidence. Overall, rebalancing is expected to produce slower growth and Fitch has cut its growth forecast to 2.5% from 3.2% for 2014 and to 3.2% from 3.8% for 2015. Externally, Fitch acknowledges that Turkey remains a standout both within EMEA and the 'BBB' category on many key metrics. We now expect current account adjustment to gather pace with the deficit shrinking to 6% of GDP in 2014 and 5% in 2015. However, given its large gross external financing needs and its weak international liquidity position, we believe that a sharp, sustained downturn in capital inflows would have a material adverse impact on Turkey's economic and financial stability. Balance of payments data confirms that on a 12-month rolling basis portfolio inflows have fallen from a peak of USD49bn in May 2013 to less than USD20bn in January 2014, while deposits have displayed a similar trend. Nevertheless, Fitch does not believe that Turkey is facing a 'sudden stop' of capital. Corporate and financial borrowers continue to enjoy roll-over rates of well over 100%, while sovereign debt issuance of USD4bn to date in 2014 has been oversubscribed. However, net external debt as a percentage of GDP remains on an upward trajectory, while the non-bank private sector is heavily exposed to interest rate and exchange rate shocks. Fitch believes that Turkey's resilience to external shocks should not be underestimated. Turkey successfully navigated the Lehman and eurozone debt crises without a 'sudden stop' of capital. Moreover, its upgrade to investment grade in November 2012 (BBB-/Stable) owed much to a demonstrable track record of fiscal consolidation since 2002 and a relatively strong banking system. These rating attributes remain intact for the most part and serve as a strong bulwark against external weaknesses. Central government fiscal outcomes were better than expected in 2013, thanks to strong revenue growth, and the general government deficit (GGD) is estimated to have remained virtually unchanged from 2012 at 1.6% of GDP. Fitch expects a modest widening of GGD to 2%-3% of GDP in 2014-15. However, Turkey's favourable public debt dynamics should remain intact with gross general government debt (GGGD) trending down gradually from 38.9% of GDP at end-2013. Fiscal financing needs are manageable at around 10% of GDP, while the FX share of GGGD has come down from 60% to around 30%. Turkey's ratings are supported by the banking system's investment grade ('a' or 'bbb') Fitch Banking System Indicator. The system is well-capitalised, profitable and boasts only modest non-performing loans of less than 3%. Set against this has been rapid credit growth over a sustained period, implying that loan books are highly unseasoned. This has elevated Turkey into the highest '3' category of Fitch's Macro-Prudential Indicator. Nonetheless, Fitch notes that even at the height of the global financial crisis, NPLs did not rise above 5.4% in 2009, while consumer and commercial loan growth has started to trend down towards the CBRT's reference rate of 15% per annum. Political risk remains a key unknown and one that Turkey has long scored poorly on. The Gezi park protests in May 2013 have been superceded by a series of allegations against the AKP leadership, raising concerns about governance. Even so, the AKP defied expectations in local elections on 30 March, capturing over 45% of the vote and bolstering Prime Minister Erdogan's hopes of standing as president. Nonetheless, Fitch expects political noise to remain an enduring feature of Turkey ahead of presidential elections in August and parliamentary elections in June 2015, periodically clouding the economic outlook. RATING SENSITIVITIES The Stable Outlook reflects the fact that in Fitch's view, upside and downside risks to the rating are balanced. The main factors that individually or collectively might lead to rating action are as follows: Negative: - A sharp, sustained downturn in capital inflows that has a material adverse impact on economic and financial stability. - Heightened political volatility that precipitates unpredictable macroeconomic policy responses, decreased government effectiveness and/or a weaker business environment. - Policy reversals that lead to resumption of rapid credit growth and widening current account deficits, accompanied by material increases in net external debt over the medium term. Positive - A material and durable reduction in the current account deficit, coupled with a rebalancing of net capital inflows towards longer-term instruments and a sustained increase in international reserves. - A track record of lower and more stable inflation. - Structural reforms that raise gross domestic savings and attract greater foreign direct investment. KEY ASSUMPTIONS Turkey's ratings are based on a number of key assumptions: - Continued commitment to fiscal sustainability. - US Federal Reserve 'tapering' proceeds in an orderly manner such that there is no 'sudden stop' of capital flows to countries like Turkey with large CADs and roll-over rates on external debt remain high. - International oil prices evolve broadly in line with Fitch's projections of USD105/bbl in 2014-15. Contact: Primary Analyst Paul Rawkins Senior Director +44 20 3530 1046 Fitch Ratings Limited 30 North Colonnade London E14 5GN Secondary Analyst Gergely Kiss Director +44 20 3530 1425 Committee Chairperson Andrew Colquhoun Senior Director +852 2263 9938 Media Relations: Peter Fitzpatrick, London, Tel: +44 20 3530 1103, Email: peter.fitzpatrick@fitchratings.com. Additional information is available on www.fitchratings.com Applicable criteria, 'Sovereign Rating Criteria' dated 13 August 2012 and 'Country Ceilings' dated 09 August 2013, are available at www.fitchratings.com. Applicable Criteria and Related Research: Sovereign Rating Criteria here Country Ceilings here Additional Disclosure Solicitation Status 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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