RAM Ratings assigns gBBB3(pi) global-scale rating to Turkey

Published on 19 May 2015

RAM Ratings has assigned respective global-scale and ASEAN-scale sovereign ratings of gBBB3(pi)/stable and seaA1(pi)/stable to Turkey. Turkey’s ratings are anchored by a commendable track record of fiscal discipline, given its current level of development. This is, however, moderated by the country’s weak external position and institutional framework. “Our rating coverage on Turkey will contribute to the further understanding of Turkish banks that have recently made issuances in the ringgit sukuk market,” says Esther Lai, RAM’s Head of Sovereign Ratings. Turkiye Finans Katilim Bankasi AS and Kuveyt Türk Katilim Bankasi AS both issued their inaugural sukuk issuances in 2014 and 2015, respectively.

Turkey’s fiscal matrices compare favourably against most of its rating peers. The republic’s fiscal deficit and government debt levels of 1.3% and 38.7% of GDP, respectively, in 2014 (2010: 3.7% and 44.4%) were low and provided the underlying support for its ratings. However, approximately a third of government debt in Turkey is denominated in foreign currencies, which may expose its finances to some volatility in view of the recent depreciating trend of the lira and the country’s relatively hefty interest burden (12.1% of fiscal revenues).

Turkey is a well-diversified, upper middle-income economy. Its key industries – logistics, commercial-vehicle manufacturing and tourism – benefit from its strategic location and young demographic structure. In 2015, Turkey’s economy is expected to expand 3%, only marginally faster than the 2.9% in 2014 and underperforming its previous 10-year average growth of 5%. This relatively lacklustre pace of growth is largely due to weaker domestic demand conditions amid policy uncertainties in the lead-up to the June general election and an elevated interest rate environment.

Turkey’s longer-term growth trend is constrained by its persistent domestic savings-investment deficit and sub-par productivity growth. These factors had led to increased dependence on imports and external liquidity, as shown by the country’s relatively wide current account deficit of 4.5% of GDP in 2014 (previous 10-year average: 6.1%). Notably, Turkey’s current account deficit has consistently been the widest in our rating portfolio, underscoring its especially weak external position. Moreover, we observe that Turkey’s forex reserves, which were only equivalent to its short-term external debt as at end-2014, are insufficient to serve as a buffer during periods of risk aversion. This particular weakness is exacerbated by the fact that a large proportion of the country’s current account deficit (80%-90%) is financed through volatile portfolio flows. Consequently, we expect Turkey’s growth trend to remain volatile and highly sensitive to external events.

Separately, policy predictability and coherence in Turkey has deteriorated somewhat during the country’s current election cycle which extends from March 2014 to June 2015.

Turkey’s ratings will be revised upwards if there is a structural improvement in its external position. This will be evident through a persistent improvement in the current account balance, increased reserve buffers and a change in the funding structure of the current account deficit (i.e., from portfolio financing to FDI inflows). On the other hand, Turkey’s ratings will face downward pressure if its growth trend deteriorates further as a result of the lack of reform of current structural issues or if the institutional framework experiences more stress.

Media contact
Jason Fong
(603) 7628 1103
jason@ram.com.my