The Republic of Turkey’s (B-/Negative/C) newly elected government is expected to continue the market-friendly economic policies of the outgoing administration, Standard & Poor’s Ratings Services claims.
The new government will be led by the moderate Islamic-oriented Justice and Development Party (AKP), which won an absolute majority in parliament in recent national elections.
Prospects for change to the sovereign’s creditworthiness will depend largely on the new government’s policy stance and the rigour with which it implements its policies.
“The negative outlook on Turkey reflects the risk that difficult debt dynamics could worsen and threaten the IMF-supported economic programme, particularly if the process of forming a new government is divisive,” says Marie Cavanaugh, a director of Standard & Poor’s Sovereign Ratings. “The ratings on Turkey are constrained by a fragmented political environment, in which personality-driven politics and short-run positioning frequently limit attempts to implement policies conducive to sustainable and more equitable growth. Other constraining factors are a high public sector debt burden with a short maturity profile and a fragile banking sector.”
The ratings are supported by the successful macro-economic and structural reforms that have been implemented over the past year and planned through 2004 under the auspices of the standby arrangement with the IMF. During the election campaign, all but two far-right parties endorsed the importance of a sound, IMF-supported economic programme.
As industrial production is strengthening, inflation is falling below target, and the Turkish lira is relatively stable, crucial fiscal adjustment may be less difficult than in the past, particularly if there are no negative external shocks.