Posted on 23 November 2011
Fitch Ratings has affirmed Turkey’s rating at BB+ one step away from investment grade, despite revising the country’s long-term foreign and local currency Issuer Default Ratings (IDR) to Stable from Positive. The agency also affirmed Turkey’s Short-term foreign currency IDR at ‘B’ and Country Ceiling at ‘BBB-‘.
“The revision of the Outlook to Stable reflects an increase in near-term risks to macroeconomic stability as Turkey faces the challenge of reducing its large current account deficit and above-target inflation rate against the background of deterioration in the global economic and financing environment,” says Ed Parker, Managing Director in the EMEA Sovereign group at Fitch.
“Nonetheless, the ratings are supported by favourable government debt dynamics, a healthy potential growth rate and a strong banking sector. If Turkey attains a ‘soft landing’ and near-term macro-financial risks recede, then upward rating dynamics could resume,” added Parker.
Among the reasons for the downgrade is growing inflation, coupled with the long running problem of its large current account deficit. Fitch also states that the Turkish economy “overheated” in the first half of this year, when a 36% yoy growth in bank credit, fuelled double-digit GDP growth, rising inflation and a widening in the current account deficit (CAD) to USD78bn in the 12 months to September 2011 (which Fitch estimates would be the second highest in the world after the US).
In fact, many of the metrics used to rate a country would put Turkey below a BB+ rating, but for its massive strength in other areas. Turkey has very low public debt, and its strong and improving public finances are supporting its ratings. Fitch forecasts the general government budget deficit will decline to just 1.3% of GDP in 2011, from 3.3% in 2010 and 5.8% in 2009, albeit buoyed by the booming economy. It also forecasts that general government debt will continue to decline. The sound banking sector, which Fitch says is well capitalised, profitable, moderate in size, and has a low ratio of non-performing loans, as well as a loan/deposit ratio below 100% and minimal FX lending to households.
It is important to remember that this is not a downgrade. Recently many had believed that Turkey was on track to be upgraded to investment grade, and if evidence mounts that Turkey will enjoy a “soft-landing” from its recent boom then it could well yet see such an upgrade.