Fitch downgrades Turkey’s outlook to negative, keeps investment grade

By bne IntelliNews August 22, 2016

Fitch Ratings announced on August 19 that it has affirmed Turkey's long-term foreign and local currency issuer default ratings (IDR) at 'BBB-', the lowest investment grade, but it downgraded the outlook to negative from stable.

Fitch’s decision was in line with market expectations. Market participants were expecting Fitch to affirm Turkey at the lowest investment grade or to delay the review or, in the worst-case scenario, to change the country’s rating outlook to negative from stable. Concerns over political risks escalated after the July 15 failed coup attempt. However, the Turkish government seems to have proved its stability during the last month.

The revision of the outlook reflected heightened risks to political stability after the July 15 coup attempt, and heightened risks to economic performance and economic policy due to political uncertainty, Fitch said.

External vulnerabilities are large but long-standing and financing has been resilient in the aftermath of the coup attempt, Fitch also said, adding that the current account deficit has continued to narrow due to the lagged impact of lower oil prices on the import bill, despite the drop in tourism revenues.

Fitch forecasts the current account deficit to bottom at 4.3% of GDP in 2016, before rising to close to 6% of GDP by 2018.

Headline fiscal performance has remained solid this year, with a central government primary surplus of 1.3% of projected full year GDP in the first half of this year, despite the implementation of spending commitments made at the late-2015 election (most of which are one-off), according to Fitch. Average inflation has fallen so far in 2016, due to food prices, but at forecast 8.2% remains well above the peer median of 1.7%, while the banking sector functioned smoothly through the coup attempt and deposit outflows were minimal, said Fitch.

Prolonged or deepened political instability, insecurity or geopolitical stresses that undermine economic performance or economic policy credibility; a materialisation of stresses stemming from external financing vulnerabilities, a reversal in the declining trend in debt to GDP ratio or a worsening of external imbalances could individually or collectively trigger a rating downgrade, Fitch warned.

Atilla Yesilada, Turkey analyst at GlobalSource Partners, told bneIntelliNews that he expects interest in Turkey to increase in the coming weeks, as its markets begin to lag the EM rally and trade at greater discounts to EM index averages. “Yet, Fitch and later Moody’s assessments of the credit ratings are the flies in the soup, as well as Ankara’s deteriorating relations with the US and EU”, according to Yesilada.

Moody’s and Fitch currently rate Turkey at the lowest investment grade while S&P has already downgraded Turkey on July 20 to junk level, lowering its foreign and local currency sovereign credit ratings to BB/B and BB+/B, respectively, from BB+/B and BBB-/A-3. S&P also raised on August 1 its risk assessment for Turkey to a "high risk" five from a "moderately high risk" four.

S&P and President Recep Tayyip Erdogan have been at odds during recent years. Erdogan has harshly criticized S&P many times and the Turkish government did not renew its agreement with the rating agency.

Moody’s on July 18 placed Turkey's credit rating on review for a downgrade to assess the effects of the failed coup attempt. The rating agency said it would complete the review within 90 days of the July 18 announcement. Later in July, Turkish Finance Minister Naci Agbal held a meeting with Moody’s.

“I think the step S&P took was hasty, and I believe that the final evaluations by Moody's and Fitch will be positive. There is a great deal of harmony between the suggestions of Moody's and Fitch for the Turkish economy and our government's targets,” Agbal told Reuters.

On August 5, Moody’s said it stopped short of issuing a ratings statement for Turkey and its review of the country’s Baa3 rating remains ongoing.

GDP Growth Projections for Turkey  
(%) 2016
EBRD (May 2015) 3.0
European Commission (May 2016) 3.5
Turkish Government - Medium Term Programme (Jan 2016) 4.5
IMF (April 2016) 3.8
Turkish Central Bank survey (Apr 2016) 3.6
World Bank (June 2016) 3.5
OECD (June 2016) 3.9
Reuters Poll (September 2015) 3.0
Fitch (September 2015) 3.0
S&P (October 2015) 2.8
Moody's (March 2016) 3.4
Source: ebrd, ec, dpt, imf, tcmb, oecd, world bank, s&p, kap  

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