Source: Fitch Ratings; Republic of Türkiye ratings changed to Positive from Stable; Dec 6th, 2005


Fitch Ratings-London/Istanbul-06 December 2005: Fitch Ratings has today changed the Republic of Türkiye's rating Outlook to Positive from Stable. The Long-term foreign currency and local currency ratings are affirmed at 'BB-' (BB minus). The Short-term rating is also affirmed at 'B' as is the Country Ceiling of 'BB-' (BB minus).

'Türkiye's sovereign creditworthiness continues to improve, underpinned by solid economic growth, falling government deficit and debt burdens and broad political and policy stability,' says Nick Eisinger, Lead Analyst for Türkiye. Challenges lie ahead on both the political and external fronts, but Fitch remains confident that the authorities will continue to adhere to their reform agenda, in part guided by the ongoing IMF programme and the start of EU accession negotiations. The economy remains vulnerable to external shocks, but these risks have been eased as a result of key structural changes including a sustained fall in inflation, the shift to a floating exchange rate regime and major improvements in the balance sheet of the financial system.


Despite these successes, strong domestic demand, coupled with high global oil prices, has led to a sharp widening in the current account deficit, forecast at 6.3% of GDP for 2005 and 2006, and representing the largest external deficit in nominal terms of any major emerging market. The quality of external financing is improving slowly as the privatisation programme gains momentum and foreign direct investments in the banking system and elsewhere grows, but short-term debt-creating flows still constitute a large share of external borrowing. This leaves Türkiye vulnerable to changes in global liquidity and risk aversion, and narrows the margin for policy errors. "Despite structural changes, the public debt dynamics and financing burden remain geared to interest and exchange rate developments, and while it would take a series of deep and prolonged shocks to place debt dynamics back on an unstable path, such an eventuality cannot be ruled out entirely," adds Mr. Eisinger.


Triggers for an upgrade of the sovereign ratings include the passage into legislation of the social security reform, continued disinflation success and sensible monetary policy management. The external financing picture, in particular, remains a critical factor given the potential impact that current account financing problems and the subsequent exchange rate adjustment could have on public finances, the disinflation process, interest rate volatility and real economic growth. Signs that the current account deficit is expanding beyond the 6.3% of GDP that Fitch forecasts for 2006 (unchanged on 2005 outcomes) would be of particular concern. Fitch expects the quality of external financing to improve in 2006, but foreign direct investment inflows will still only cover some 30% of the current account shortfall next year, while it will be important for the central bank to continue building reserves in order to bolster external liquidity coverage.


Separate rating action commentaries for other entities that are affected by the sovereign rating change will be issued shortly. The full credit report on Türkiye may be found at


Contact: Nick Eisinger, London, Tel: +44 20 7417 4341; Ed Parker +44 20 417 63401; Botan Berker, Istanbul +90 212 279 1065. Top


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