Turkey: Moody's affirms Turkey's rating as "B2"

Moody's affirmed Turkey's long-term external debt rating as B2.

Moody's affirmed Turkey's long-term external debt rating as B2.

 

·        Foreign Issuer Rating confirmed as B2.

·        Long Term Local Debt Rating affirmed as B2.

·        Local Issuer Rating confirmed as B2.

·        Outlook remained “negative”.

 

Moody's report lists the stabilizing factors in confirming Turkey's rating as follows:

 

1. Regardless of the current pressure on the FX, Turkey's core external vulnerability risk has decreased, with a low current account deficit supporting the gradual restructuring of FX reserves on a gross and net basis.

2. Turkey's diversified private sector is relatively resilient to currency volatility, as the country's banks and companies with foreign borrowings are well hedged against currency depreciation, including by holding substantial foreign currency deposits abroad.

3. Moody's expects Turkey's public finances to remain relatively strong, with public debt remaining at around 40% of GDP in 2022. However, risks have increased as the sharp depreciation of the lira will suppress the government's debt ratio due to its massive exposure to foreign currencies.

 

Despite the above-mentioned developments, the decision to maintain the “negative” outlook mainly reflects the increasing policy unpredictability, especially the Central Bank's monetary policy stance that puts pressure on the exchange rate, and volatile international capital flows. The current economic policy stance will lead to significantly higher inflation in the coming months, eroding households' purchasing power and increasing the likelihood of a sharp slowdown in growth despite low interest rates. Fiscal policy has so far remained cautious, while upcoming elections could lead to looser fiscal policy to stimulate economic growth. Alternatively, authorities could press for large-scale credit stimulus, which has negative effects on the current account deficit, as seen in 2020.

 

Regarding the reserves; While the central bank has started selling foreign currency in the past few days, Moody's does not expect a repeat of last year's reserve depletion, as bank reserve requirements and reserves are expected to remain negative at US$30 billion in the case of swaps between banks. As for external financing needs; Although as large as approximately US$200 billion, or 25% of GDP, more than half of the total amount is viewed positively as coming from stable sources of financing that do not require access to a trust-sensitive market. It is stated that commercial loans and non-resident deposits in the banking sector have been largely stable between US$ 70-85 billion in recent years. Turkish banks and big companies are well protected against currency depreciation. The banking sector generally has a broadly stable foreign currency position, including large foreign currency deposits of US$43 billion abroad. The corporate sector has significant external liabilities, but its short-term foreign exchange position, defined as short-term assets minus short-term liabilities, is estimated by the Central bank to be positive US$60 billion as of August 2021.

 

Moody's expects real GDP growth to slow to around 4% in 2022, while it expects a high 11% for this year. It is evaluated that the slowdown in the growth path may be partially due to low credit growth, but it is a positive factor considering that last year's large credit impulse has worsened Turkey's external structural imbalance. Exports rather than domestic demand are likely to make a stronger contribution to growth in 2022, taking advantage of the weaker currency.

 

Public finance; Budget implementation data for the first ten months of 2021 point to a further reduction in the budget deficit this year. Central government revenues grew strongly by over 34% year-on-year, while spending growth remained modest; Aside from debt-interest spending, which rose sharply this year, spending growth remained broadly stable in inflation-adjusted conditions. The nearly 30% loss in value since the central bank began easing monetary policy in September will increase Turkey's public debt ratio compared to Moody's previous expectations.

 

The continued negative outlook mainly reflects Turkey's unpredictable policy making. Despite the high and rising inflation, the central bank's 400 basis point cuts in the main policy rate since September makes the biggest contribution to the current exchange rate stress. Frequent changes of senior staff at the central bank further limit the willingness of officials to use policy tools to calm the situation.

 

Factors that may be subject to an increase in rating or outlook:

 

·        The outlook may become stable if the currency stabilizes and maturing debt continues to roll over smoothly, suggesting that the risk of market stress is low.

·        Changing the monetary policy stance, which focuses on restoring inflation expectations, will also be positive.

·        Ratings may be upgraded if the improvements in the external account continue rapidly and foreign currency reserves are further restructured.

·        A decrease in the share of FX-linked government debt would also support a higher rating.

 

Factors that could be subject to a downgrade in rating or outlook:

 

·        Ratings will come under further downward pressure in a scenario of further major currency depreciation that increases the risk of significant deposit withdrawals from the banking system, as opposed to the current trend for depositors to switch to dollar deposits but retain their savings in the banking sector.

·        Signs that the central bank is again using its foreign exchange reserves to curb downward pressure on the currency will also be negative.

·        Foreign currency reserves remain negative when effectively excluding reserves borrowed from the banking sector (in the form of reserve requirements and swaps with the central bank).

·        Finally, a change in the fiscal policy stance -- leading to a rising debt trend with significantly higher deficits -- would be negative for ratings.

 

Credit Rating Profile:

 

·        Fitch's long-term foreign currency debt rating: BB-, outlook negative.

·        S&P long-term foreign currency debt rating: B+u, stable outlook.

 

Latest Rating Actions:

 

·        Fitch downgrades Turkey's outlook to negative and approves its credit rating.

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