Turkey’s credit profile balances resilient growth, manageable gov’t debt: Moody’s
Turkey’s (Ba1, negative) credit profile reflects its large and flexible middle-income economy, resilient growth and favorable demographics, Moody’s Investors Service said in an annual report on Nov. 17.
The country’s key credit challenges include political risk and high external vulnerability.
“Although Turkey’s public finances have deteriorated marginally over the past year due to fiscal stimulus and the weaker lira, the country’s resilient economic growth and manageable government debt metrics continue to provide key credit anchors,” said Kristin Lindow, a Moody’s senior vice president and co-author of the report.
Public finances are a source of strength for Turkey’s sovereign creditworthiness. That said, fiscal outcomes will likely be challenged in an environment of rising global interest rates, already wider spreads and larger borrowing needs.
Although Turkey’s stock of debt remains moderate at less than 30 percent of the GDP, bigger fiscal deficits and associated borrowing have put the debt-to-GDP ratio on an upward path after more than a decade of steady decline.
Under Moody’s central scenario, the general government debt-to-GDP ratio is expected to stay below 30 percent in 2018. High nominal GDP growth - fed by rapid inflation - will largely offset heavy borrowing to finance wider budget deficits.
Turkey has a high susceptibility to event risk mainly driven by domestic political risks and the country’s large external financing needs due to wide current account deficits and sizeable external or foreign currency refinancing requirements, the report noted.
Balance-of-payments pressures constrain any upgrade in Turkey’s sovereign rating, as long as external imbalances and annual refinancing requirements remain large.
“However, upward rating pressure could follow structural reductions in these vulnerabilities or improvements in Turkey’s institutional environment or competitiveness,” read the report.
“Reduced political risk - while credit positive - would not result in rating upgrades without sustainable improvement in external vulnerability, although it could lead to a stabilization of the rating outlook,” it added.
Turkey’s sovereign rating could be downgraded if the probability of a balance-of-payments crisis were to rise.
“Such an event would likely be associated with some combination of a rapidly weakening exchange rate and a sharp reduction in foreign exchange reserves driven by shortfalls in funding the country’s wide external deficit,” Moody’s said.
“Sustained lower growth and a related worsening in the government’s fiscal strength could also lead to a downgrade, as could a further erosion of institutional strength,” it added.
The coherence of Turkey’s macro policy framework and the maintenance of fiscal and external stability will remain important drivers of sovereign creditworthiness, according to Moody’s.