January 27, 2017 / 9:08 PM / 3 years ago

Fitch Downgrades Turkey's LTFC IDR to 'BB+'; Outlook Stable

(The following statement was released by the rating agency) Link to Fitch Ratings' Report: Turkey - Rating Action Report here LONDON, January 27 (Fitch) Fitch Ratings has downgraded Turkey's Long-Term Foreign Currency Issuer Default Rating (IDR) to 'BB+' from 'BBB-'. The issue ratings on Turkey's senior unsecured foreign currency bonds have also been downgraded to 'BB+' from 'BBB-'. Fitch has affirmed the Long-Term Local Currency IDR at 'BBB-' and the issue ratings on Turkey's senior unsecured long-term local-currency bonds have also been affirmed at 'BBB-'. The Outlooks on the Long-Term IDRs are Stable. The Country Ceiling has been revised down to 'BBB-' from 'BBB' and the Short-Term Foreign-Currency IDR downgraded to 'B' from 'F3'. The Short-Term Local-Currency IDR has been affirmed at 'F3' and the issue ratings on Turkey's senior unsecured short-term local-currency bonds have also been affirmed at 'F3'. The issue ratings on Turkey's Hazine Mustesarligi Varlik Kiralama Anonim Sirketi's (Hazine) Foreign-Currency global certificates (sukuk) have been downgraded to 'BB+' from 'BBB-'. The issue ratings on Hazine's Local-Currency global certificates (sukuk) have been affirmed at 'BBB-'. KEY RATING DRIVERS The downgrade of Turkey's foreign currency IDRs reflects the following key rating drivers and their relative weights: HIGH Political and security developments have undermined economic performance and institutional independence. While the political environment may stabilise, significant security challenges are set to remain. A constitutional reform process is progressing, which, if approved in a referendum likely to be held in March or April, would entrench a system in which checks and balances have been eroded, in Fitch's opinion. The purge of the public sector of the supporters of the group that the government considers responsible for the coup attempt in July has continued and a state of emergency remains in place. The scope of the purge, which has extended to the media and other groups, has unnerved some participants in the economy. High-profile terrorist attacks have continued, damaging consumer confidence and the tourism sector. MEDIUM The failure to address long-standing external vulnerabilities has been manifest in a sharp fall in the currency. Fitch does not expect systemic problems that would jeopardise financial stability or trigger a balance of payments crisis, but it does assume a detrimental impact on the private sector. Turkey's strained international liquidity position (at 76.1 the liquidity ratio is half the BBB median) make it vulnerable to shifts in investor sentiment. Indicators of external liquidity are generally little changed since Fitch upgraded Turkey to investment grade in 2012, but the stock of net external debt/GDP has continued to rise, to 30.4% at end-2016 from 22.7% at end-2012, and compared with a 'BBB' median of 2.3% and a 'BB' median of 20.1%. Evolving domestic and external conditions bring the potential for further tests of Turkey's ongoing resilience in external financing. Economic growth fell sharply in 2H16 and is expected to recover to a pace that is well below the country's performance in recent years. A rebound is anticipated after the 1.8% yoy contraction in 3Q16, but this will be held back by weak domestic demand stemming from security and political conditions and, over the near term, currency depreciation. Growth is forecast to average 2.3% between 2016 and 2018, compared with an average of 7.1% over the five years ending 2015 (based on new data after a credible GDP revision). Investment is not expected to pick-up unless structural reform is pursued more aggressively than in recent years. Banks have been hit by the slowing economy. Headline non-performing loans are low and stable at around 3% of total loans. However, the volume of at risk restructured loans (including in the tourism and energy sectors) has increased and further restructurings are likely, potentially also to offset rising FX costs. Weaker GDP growth could also put pressure on asset quality. Sector capitalisation, supported by adequate NPL reserve coverage, is sufficient to absorb moderate shocks, but sensitive to further lira depreciation and NPL growth. Refinancing risks have increased, although foreign currency liquidity remains broadly adequate to cover short-term sector wholesale funding liabilities due within one year. The sustained growth in credit to the private sector, to an estimated 68% of GDP at end 2016 from 49% at end 2012, also indicates a heightened level of vulnerability. The affirmation of Turkey's Local Currency IDRs reflects: Fitch judges that in the 'BB' rating category, the strength of public finances over external finances is sufficient for a one-notch uplift. The general government debt to revenues ratio is under half the level of the 'BB' medium, reflecting a track record of primary surpluses and a broader revenue base. Net and gross government debt levels are also well below the peer median. Government foreign currency debt was 36% of total debt at end-2016 compared with a 'BB' median of 51.3%. Turkey also scores better than the 'BBB' median for each of these indicators. Fiscal outturns remained strong compared with rating peers in 2016 despite the political turbulence and slowing economy, with the general government deficit estimated at 1.6% of GDP. Additional revenue raising measures were introduced in 4Q16, including a restructuring of debtor arrears and selective consumption tax hikes, to ensure that the central government deficit target was 1.1% of GDP was achieved. Debt to GDP is estimated at 27.8% at end-2016 and Fitch expects it to be broadly flat over our forecast period to end-2018. Contingent liabilities are rising, but from a low base and are unlikely to have a material impact on government finances over the forecast period. Turkey's IDRs also reflect the following key rating drivers:- Turkey is a large and diversified economy with a vibrant private sector. Human Development and Doing Business indicators, as measured by the World Bank, are in excess of the 'BB' medians. GDP per capita is double the peer median, although the volatility of economic growth is well in excess of peers reflecting a vulnerability to regular domestic and external shocks. The current account deficit is large relative to peers and persistent. Fitch assumes that the deficit has passed its narrowest point on a rolling 12-month basis and estimates a deficit of 4.8% of GDP in 2016. Exchange rate induced import compression and an improvement in export competitiveness will limit the deterioration of the current account deficit in 2017 based on Fitch's current oil price forecasts. Ongoing security concerns mean that tourism revenues will be well down on 2013-2015 levels over the forecast period. Inflation is well in excess of peers and is set to temporarily return to double digits in 1H17. The five-year average of 8.1% compares with a 'BBB' median of 2.7% and a 'BB' median of 3.4%. As Fitch has stated previously, undue influence on the central bank has prevented it from hitting its inflation target. The central bank has taken gradual steps to tighten policy over the last few weeks including raising rates on 24 January, but in Fitch's view, policy is not sufficiently tight to hit the 2017 inflation target. The policy simplification process appears to have been put on hold. SOVEREIGN RATING MODEL (SRM) and QUALITATIVE OVERLAY (QO) Fitch's proprietary SRM assigns Turkey a score equivalent to a rating of BBB on the Long-Term FC IDR scale. Fitch's sovereign rating committee adjusted the output from the SRM to arrive at the final LT FC IDR by applying its QO, relative to rated peers, as follows: - External finances: -1 notch, to reflect a very high gross external financing requirement and very low international liquidity ratio. - Structural features: -1 notch, to reflect regular serious terrorist attacks and a political environment that has negatively affected economic performance. Fitch's SRM is the agency's proprietary multiple regression rating model that employs 18 variables based on three year centred averages, including one year of forecasts, to produce a score equivalent to a LT FC IDR. Fitch's QO is a forward-looking qualitative framework designed to allow for adjustment to the SRM output to assign the final rating, reflecting factors within our criteria that are not fully quantifiable and/or not fully reflected in the SRM. RATING SENSITIVITIES The main factors that, individually, or collectively, could lead to negative rating action are: - Heightened stresses stemming from external financing vulnerabilities. - Weaker public finances reflected by a deterioration in the government debt/GDP ratio. - A deterioration in the political or security situation. The main factors that, individually, or collectively, could lead to positive rating action are: - Implementation of reforms that address structural deficiencies and reduce external vulnerabilities. - A political and security environment that supports a pronounced improvement in key macroeconomic data. KEY ASSUMPTIONS - The government maintains its commitment to fiscal stability. - Economic relations with key trading partners will not deteriorate seriously. - Fitch forecasts Brent Crude to average USD45/b in 2017 and USD55/b in 2018. Contact: Primary Analyst Paul Gamble Senior Director +44 20 3530 1623 Fitch Ratings Limited 30 North Colonnade London, E14 5GN Secondary Analyst Toby Iles Director +852 2263 9832 Committee Chairperson Tony Stringer Managing Director +44 20 3530 1219 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 Country Ceilings (pub. 16 Aug 2016) here Criteria for Rating Sukuk (pub. 16 Aug 2016) here Sovereign Rating Criteria (pub. 18 Jul 2016) here Additional Disclosures Dodd-Frank Rating Information Disclosure Form here _id=1018279 Solicitation Status here Endorsement Policy 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 WEB SITE AT 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. 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