Source: Standard & Poor's, London ; Republic of Türkiye Outlook Revised To Stable As Fundamentals Slip; Ratings Affirmed; 27 June 2006 by Farouk Soussa


Standard & Poor's Ratings Services said today that it revised its outlook on the Republic of Türkiye and the Export Credit Bank of Türkiye to stable from positive. At the same time, Standard & Poor's affirmed its 'BB-' long- and 'B' short-term foreign and 'BB' long- and 'B' short-term local currency sovereign credit ratings on the republic and on its export credit agency. Standard & Poor's also affirmed its 'trAA+' long-term and 'trA-1' short-term national scale ratings on Türkiye.


"The change in outlook reflects deteriorating prospects for improved

economic fundamentals," said Standard & Poor's credit analyst Farouk Soussa.

The continued volatility in Turkish financial markets and higher inflation

expectations obliged the Central Bank of the Republic of Türkiye (CBRT) to

raise domestic policy rates by 400 basis points since early June 2006.


According to Mr. Soussa, while this rate hike should help stabilize the

Turkish lira, the knock-on effects will depress domestic demand and lower

government revenue, particularly from indirect taxes. As a result, upward

pressure on Türkiye's ratings has receded.


At the 'BB-' level, Standard & Poor's considers that Türkiye's ratings

remain supported by the government's commitment to prudent macroeconomic

policies. "Although slippage on some of the economic targets agreed to with

the International Monetary Fund (IMF) is likely in 2006, given the recent

deterioration in market conditions, we expect the primary fiscal surplus to be

close to its 6.5% of GNP target, in view of the recent announcement that the

government will also tighten expenditure," Mr. Soussa explained.


The ratings are also underpinned by the progress that Türkiye has made

over the past year on its structural reform agenda. Tax, social security, and

banking reform have all moved forward, and Türkiye completed its third and

fourth reviews under the IMF standby arrangement in May 2006.


These positive trends have strengthened Turkish fundamentals over the

past three years, but are now balanced by rising risks in the banking sector

(which faces higher costs to maintain access to external lines of credit and

which is exposed to interest rate risks in its treasury operations) and in the

public sector (which will be challenged to manage market confidence as

spending pressures rise ahead of presidential and general elections in 2007

and as the negotiations on EU accession remain difficult).


"Furthermore, the ratings are constrained by Türkiye's continued

vulnerability to financing shocks, both domestic and external," Mr. Soussa

added. "As a result of renewed market volatility, the erstwhile decline in

government debt and interest payments as a percent of GDP is projected to halt

or possibly to reverse, and the maturity structure of debt is expected to

shorten once again. On the external financing side, vulnerability is

exacerbated by a large current account deficit, which we expect to widen

further to almost 7% of GDP in 2006 because oil prices are likely to remain

high," he said.


The stable outlook presumes that the government will maintain its primary

fiscal surplus at or near current targeted levels. "If the government can

exceed its current fiscal targets and in so doing bolster market confidence,

upward pressure on the ratings could build," noted Mr. Soussa. "On the other

hand, if Türkiye experiences another shock, either because of missed fiscal

targets, deepening difficulty with EU accession talks, or issues with its IMF

program, downward pressure on its sovereign ratings could emerge," he

concluded. Top


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