The gross debt stock of Turkey's central government increased 15% y/y to stand at TRY806bn (€204bn) as of the end of May, the Turkish treasury said on June 20. On a monthly basis, central government debt rose 1.48% from TRY795bn at end-April.

Central government debt growth fell to as low as 3% in September last year but then began to accelerate in October, mainly due to the Turkish lira’s depreciation. Annual debt growth reached the peak point of 17% in January and has stayed high since then despite slight declines. The main concern, however, is still the fast expansion of the private sector's external debt.

Leverage in the corporate sector has risen rapidly, especially since the global financial crisis prompted the world’s major central banks to pump billions of dollars into the system. That made it easier for Turkish banks and firms to source low-cost foreign funding.

The treasury also said on June 20 that the domestic debt stock rose by 8% y/y to TRY490bn at the end of May, while the external debt stock increased by 27% y/y to TRY249bn, mainly due to the lira’s depreciation.

The Turkish government’s debt stock rose 12% y/y to TRY760bn by end-2016.

The government’s budget was stretched by a set of economic stimulus measures brought in during the build-up to the April 16 referendum that officially narrowly voted to bring in an executive presidency. Consequently, the deficit in the first five months of 2017 amounted to TRY11.5bn against the surplus of TRY9.07bn posted for the same period of 2016.

Turkey’s ratings are supported by the government's low debt burden and the expectation of only a modest accumulation of further liabilities on the government's balance sheet, relative to GDP, S&P Global Ratings said on May 5 when affirming its unsolicited 'BB/B' foreign currency long- and short-term sovereign credit ratings on Turkey with a negative outlook.

Public debt in both Russia and Turkey is set to rise over the next two years, although the increases will be modest as a share of GDP, Moody’s Investors Service said in report published last month.

Moody’s expected that the Turkish government “will be reluctant to withdraw its fiscal stimulus, which is propping up growth, leading to modestly rising debt-to-GDP ratios over the next two years. Fiscal strength nonetheless remains a key credit anchor”.

“A weakening of public and external finances reflected in a deterioration of the government debt/GDP ratio or heightened external financing vulnerabilities are negative rating sensitivities,” Fitch Ratings said on April 18.

Moody’s said in March that “weaker growth is negatively impacting Turkey's key credit anchor - its healthy public finances and low government debt.” Moody's expects the increase in government spending to continue into 2018, the fiscal deficit to widen and bond yields to continue to rise, with adverse implications for Turkey's debt metrics.

The European Commission (EC) forecasts Turkey’s general government gross debt to decline to 26.5% of GDP in 2017 from 28.3% in 2016 while the Commission foresees the general government deficit reaching 1.6% of GDP in 2017 from 0.9% a year ago.

The World Bank expects Turkey’s general government debt to decline to 30.8% of GDP this year from 30.9% last year.