Published on 18 Jul 2018.
RAM Ratings has downgraded Turkey’s global and ASEAN-scale ratings to gBB2(pi)/stable/gNP(pi) and seaBBB2(pi)/stable/seaP3(pi) from gBBB3(pi)/negative/gP3(pi) and seaA2(pi)/negative/seaP2(pi), respectively. The downgrades reflect the heightened probability of an adverse economic shock and materialisation of fiscal contingency liabilities. A recent erosion of fiscal discipline, concurrently with the deterioration of governance indicators, was also a consideration.
The risk to economic growth is elevated, given that inflation which grew at its fastest annual pace in 14 years at 11.1% in 2017 (2016: 8.5%), had accelerated to 15.4% in June 2018 amid a prolonged period of unsustainable credit-fuelled growth. This uptick in prices had occurred simultaneously with the depreciation of the lira, which lost 20.3% of its value in the first six months of 2018. These conditions, which are expected to persist, present a risk to corporate profitability as the cost of imported inputs and foreign-currency debt servicing rise. Notably, there has been an observed increase in the frequency of high-profile corporate debt restructuring exercises in recent months.
Meanwhile, current global conditions have exacerbated Turkey’s vulnerable external position. The ongoing tightening of global monetary policy conditions and higher oil prices will likely contribute to the depletion of the country’s meagre reserves this year. At the same time, imports will climb as gold imports have risen amid unanchored inflationary expectations. Likewise, investor risk aversion is anticipated to remain elevated in view of political developments in recent months. This would amplify the relative cost of external debts for the country’s firms, which poses another growth risk.
In the lead-up to June elections, fiscal policy had been accommodative while budgetary discipline had deteriorated. This had followed a substantial widening of the fiscal deficit to 2.2% of GDP in 2017 (2016: 1.3%) and the implementation of unbudgeted supportive fiscal measures in 2018 – transfers to pensioners, the reduction of consumption taxes of retail fuels and the continuation of various employment and investment incentives. At the same time, fiscal risks have intensified as a likely deterioration of macroeconomic conditions may cause the crystallisation of contingent liabilities, particularly in respect of state-owned entities and public-private partnership projects which have foreign debt exposure.
While any upside to Turkey’s ratings is limited in the near term, the ratings may be upgraded if structural reforms result in a sustainable improvement in growth outlook or external position. Conversely, the ratings may come under pressure if any further escalation of balance of payments risks leads to widespread corporate and financial institution failures.
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