Turkey retains BBB Fitch credit rating

Friday, April 04, 2014

ANKARA - Global ratings agency Fitch has affirmed Turkey's long-term foreign and local currency Issuer Default Ratings at 'BBB-' and 'BBB', respectively, after the country continued commitment to its fiscal sustainability.

Fitch said in a statement on Friday that Turkey's macroeconomic policy management had improved over time as the country continued its commitment to its fiscal sustainability.

Fitch said it considered Turkey's macroeconomic outcomes to date to have been reassuring, adding: "The lira has stabilized and international reserves rebounded in February, following a steep fall in January. Domestically, industrial production and capacity utilization remain strong, underpinned by exports, whereas domestic lending growth has slowed, and there are signs of a moderation in consumer and investor confidence."

On January 28, Turkey's Central Bank doubled its borrowing rate from 3.5 percent to 8 percent.

"In taking this action, the Central Bank reaffirmed Fitch's view that the authorities are prepared to adjust domestic policy settings to avert more disruptive shocks to economic stability," the agency said.

Fitch's report said, "Macroeconomic policy management [in Turkey] has improved over time, deflecting the risk of an economic 'hard landing' reminiscent of 2001 or 2009."

However, it warned that the economy remains highly volatile. Fitch judges the "coherence and predictability of macroeconomic policy to be weaker in Turkey than in some emerging market rating peers."

The report said rebalancing in Turkish economy is expected to produce slower growth in the country. "Fitch has cut its growth forecast to 2.5 percent from 3.2 percent for 2014 and to 3.2 percent from 3.8 percent for 2015."

Fitch does not believe that Turkey is facing a 'sudden stop' of capital.

The agency also said 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."

"The Turkish banking system is well-capitalised, profitable and boasts only modest non-performing loans of less than 3 percent," the agency said.

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.

Political risk remains unknown in the country, the agency said, adding: "The Gezi park protests in May 2013 have been superseded by a series of allegations against the [ruling Justice and Development Party] leadership, raising concerns about governance.

"Even so, the AK Party defied expectations in local elections on 30 March, capturing over 45 percent of the vote and bolstering Prime Minister Recep Tayyip Erdogan's hopes of standing as president.

"A material and durable reduction in the current account deficit, coupled with a re-balancing of net capital inflows towards longer-term instruments and a sustained increase in international reserves, are the main factors that - individually or collectively - might lead to positive rating change."

The agency added: "A track record of lower and more stable inflation in Turkey, and its structural reforms that raise gross domestic savings and attract greater foreign direct investment, were positive factors which might lead to a rating change in Turkey."

However, it said that "a sharp, sustained downturn in capital inflows that has a material adverse impact on economic and financial stability" might lead to a negative rating change for Turkey.

"Heightened political volatility that precipitates unpredictable macroeconomic policy responses, decreased government effectiveness and/or a weaker business environment ... (and) policy reversals that lead to a resumption of rapid credit growth and widening current account deficits" were also factors which could weaken Turkey's credit rating, Fitch said.

On November 5, 2012, Fitch had raised Turkey's credit rating to investment grade, to BBB- from BB+, after the country's efforts to re-balance its economy away from the breakneck growth of last decades.

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