Standard & Poor's (S&P) said on Friday that it affirmed its unsolicited 'BB+/B' long- and short-term foreign currency sovereign credit ratings on Turkey. It also affirmed 'BBB/A-2' long- and short-term local currency sovereign credit ratings, and 'trAAA/trA-1' long- and short-term Turkey national scale ratings. The outlook remains negative.

The affirmation reflects the base-case scenario that the Turkish economy is gradually rebalancing as export growth improves, S&P said, adding that the economy is benefitting from the portion of nominal exchange rate depreciation that Turkey has not yet lost to higher relative inflation.

The negative outlook reflects S&P’s opinion of persisting risks to Turkey's economic prospects, the statement by the rating agency reads. The authorities have not used fiscal and monetary policy settings consistently enough to build up buffers against potential external risks, furthermore, the limited policy buffers have also partly stemmed from an erosion of institutional checks and balances, S&P said. Since February it marginally raised its base-case forecast for 2014 GDP performance to just under 3%, but without improving its expectations for long-term growth, the rating agency noted.

The continued erosion of checks and balances in Turkey's key independent institutions poses risks to business confidence and economic stability, S&P said, adding that a crowded electoral calendar and an uncertain external environment make many of its forecasts highly contingent on investor confidence in the policymaking framework.

The negative outlook reflects the view of at least a one-in-three likelihood that it could downgrade Turkey within the next 12 months if there is a balance-of-payments or growth shock, S&P explained. A severe shock could affect fiscal performance as well as financial sector stability, according to the rating agency.