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Standard & Poor’s Ratings Services has assigned its ‘BB-‘ foreign currency senior unsecured debt rating to the Republic of Turkey’s (foreign currency BB-/Stable/B, local currency BB/Stable/B) upcoming issue of US$1bn 7.25% 10-year global notes due March 15, 2015.


“The ratings on Turkey reflect the progress that the sovereign is making toward durable macroeconomic stability, and the country’s expected adherence to a strict macroeconomic program beyond 2004, which would result in further fiscal improvement, disinflation, a more sustainable public debt burden, and reduced vulnerability to market sentiment,” says Standard & Poor’s credit analyst Moritz Kraemer.


The ratings remain constrained, however, by a heavy public sector debt burden and limited fiscal flexibility. Although on a downward trend, public sector net debt remains high, at an estimated 67% for year-end 2004. Moreover, government debt remains unfavorably structured, with a large part being short-term domestic debt or foreign exchange linked. Financial flexibility continues to be constrained by high real interest rates, resulting in one of the highest interest-to-revenues ratios (about 50%) among rated sovereigns.


Against this background, implementation risk also remains a concern. Nevertheless, backed by its large parliamentary majority, the current government has significantly improved its record of policy implementation.
“The Turkish economic programme for 2005-2007, potentially backed by the IMF, and the possibility of starting EU accession negotiations sometime next year, would provide a strong policy anchor and reduce implementation risk further,” says Kraemer.


The ratings are supported by deepening macroeconomic stability. Strong efforts at fiscal consolidation, disinflation, and structural reforms, have laid the ground for rapid non-inflationary growth. Consequently, real GDP growth should be at least 6% in 2004 and 2005.


In addition, adherence to a strict economic policy programme in the context of the floating exchange rate regime has supported capital inflows. As a result, net public sector external debt is projected to continue to decline as a percentage of current account receipts to about 60% by year-end 2004. The current account deficit, meanwhile, is expected to widen to about 3.5-4.0% in 2004 and 2005, but the floating exchange rate and the cushion of official international reserves mitigate the risk of another crisis.