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.
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