Posted by meb at May 12th, 2007
Fitch Ratings has revised the Outlooks on the Republic of Turkey’s foreign currency and local currency Issuer Default ratings (“IDR”) to Stable from Positive, owing to heightened political risks. At the same time, the agency has affirmed the IDRs at ‘BB-‘ (BB minus), the Short-term foreign currency rating at ‘B’ and the Country Ceiling at ‘BB’. “Although Turkey’s current prudent fiscal policy stance, impressive growth performance and strong FDI inflows are consistent with improving macroeconomic fundamentals, negative political shocks have raised event risk and clouded the credit outlook,” says Edward Parker, Head of Emerging Europe sovereigns at Fitch.
Presidential elections have sparked an escalation in political risk in Turkey, in Fitch’s view. The military’s threat to intervene and the subsequent judgement by the Constitutional Court prevented Foreign Minister Abdullah Gul of the ruling Justice and Development Party, which has its roots in political Islam, from being elected president. Parliamentary elections will now be brought forward to July from November and may result in a weaker coalition government. The constitution may not provide a clear road map for choosing a new president, while elevated tensions between the secular establishment and political Islam may persist. EU accession, an important policy anchor, may be more problematic than before.
Meanwhile Turkey’s economy is generally performing well. Real GDP growth was 6.1% in 2006, despite market turbulence in the spring that triggered a rise in interest rates to 17.5%. And it has averaged 7.2% over the past five years – the best performance since at least the 1960s. The consolidated budget deficit narrowed to just 0.7% of GDP in 2006 from 16% in 2001, helping to reduce government debt to 61% of GDP at end-2006 from over 100% in 2001, though above the ‘BB’ range median of 40%. Public debt dynamics should remain favourable, though are vulnerable to interest and exchange rate risk, as well as a potential loosening in post-election fiscal policy.
Nevertheless, inflation remains stubbornly high at 10.7% in April and will overshoot the Central Bank’s end-2007 target of 4% by a substantial margin, for the second year running. This will reduce the scope for further monetary policy easing so that the risk of a sharper than expected slowdown of the economy cannot be wholly discounted. The current account deficit widened to 8% of GDP in 2006 from 6.4% in 2005, and Fitch forecasts 7.2% in 2007, albeit half financed by net FDI. Nevertheless, Turkey’s external debt ratios are well above ‘BB’ range peers and its gross external financing needs are the largest of any emerging market in USD terms, rendering the economy vulnerable to adverse shifts in global investor sentiment as well as domestic shocks. Official foreign reserves have risen to around USD70bn from USD37bn at end-2004, albeit partly reflecting “hot money” inflows such as non-resident purchases of local equities and domestic debt; while Turkish residents have increased foreign currency bank deposits by USD 27bn since April 2006.
source: The New Anatolian