Published on 23 Sep 2019.
RAM Ratings has revised the outlooks on Turkey’s global and ASEAN-scale ratings (gBB2(pi) and seaBBB2(pi), respectively) to negative from stable to reflect the country’s economic fragilities following a severe currency crisis in August 2018. The negative outlook is also premised on the elevated threat of the imposition of international sanctions on Turkey. The republic’s ratings have been reaffirmed in view of its track record of low fiscal deficits, a relatively light debt burden and the ongoing rebalancing of some external variables.
Turkey’s economy is expected to contract by 0.2% in 2019 (vs. 2013-2018 average: 4.9%), given weak domestic demand conditions. The country’s fragile economic conditions, which stem from the currency crisis, are underscored by sluggish investment activity as well as elevated inflation and unemployment indicators. Moreover, Turkish banks are unlikely to contribute significantly to economic growth owing to rising asset quality concerns and the higher cost of external financing. These conditions heighten the economy’s sensitivity to further confidence shocks and the slowdown in global demand conditions.
The risk of international sanctions is viewed as elevated since July 2019. Turkey’s acceptance of a Russian missile defence system exposes it to possible restrictions on cross-border transactions under current US legislation. Further, its oil and gas operations in disputed waters off Cyprus have led to the suspension of some bilateral negotiations with the EU. Any imposition of sanctions which would limit Turkey’s access to external sources of financing can have an adverse impact on its macroeconomic conditions, considering its vulnerable external position. Elsewhere, a lack of policy predictability in view of Turkey’s autocratic political structure exacerbates its susceptibility to confidence shocks and capital withdrawal risks.
Turkey’s fiscal matrices support its ratings, comparing favourably against similarly rated sovereigns. Government debt is contained at 30.4% of GDP while the country’s fiscal deficit is narrow, at 1.9% of GDP as at end-2018. The targeted budgetary deficit of 1.8% of GDP for 2019 would be challenging to achieve as the weak growth outlook would result in lower tax revenues and increase social transfers. Nevertheless, RAM expects the deficit to stay small owing to the Government’s commitment to reduce capital expenditure.
Turkey’s ratings may be downgraded in the event of severe international sanctions which would materially alter its growth prospects and fiscal position. Similarly, any confidence crisis which would derail or prolong the country’s fragile economic recovery would also be a key consideration for a downgrade. The ratings would likewise come under pressure amid widespread corporate and financial institution failures. The rating outlooks would revert to stable should these factors not materialise.
Turkey’s transferability and convertibility risk remains low despite the introduction of two new capital flow management measures in May 2019. These regulations have not markedly affected capital flows or investor confidence as the stipulated exemptions and thresholds would only affect a minority of transactions. Consequently, a one-notch sovereign weight will continue to be applied to Turkey-domiciled non-sovereign entities and/or debt issues rated higher than the sovereign. However, the risk of a reassessment of the sovereign weight is high, given the negative outlook on the sovereign rating and low external reserves as well as the possible materialisation of international sanctions or tighter capital controls.
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Ratings on Turkey