Standard & Poor’s Ratings Services has raised its long-term foreign and local currency sovereign credit ratings on the Republic of Turkey to ‘B+’ from ‘B’. At the same time, the ‘B’ short-term foreign and local currency sovereign credit ratings on Turkey were affirmed. The outlook is stable.
The long-term foreign currency ratings on the Export Credit Bank of Turkey were also raised to ‘B+’ from ‘B’, in line with those on the sovereign, the bank’s sole shareholder.
“The upgrade reflects the significant progress that the government has made toward meeting the year-end 2003 financial targets under its IMF-supported programme, and its commitment to continue implementing the program in 2004,” says Standard & Poor’s credit analyst Ala’a Al-Yousuf. “The government debt burden is expected to continue declining as a result of continued ambitious fiscal adjustment and a fall in real interest rates. Confidence in lira-denominated assets has also grown, and the exchange rate and international reserves have strengthened.”
The ratings on Turkey remain constrained by its high public sector debt and limited fiscal flexibility. Although public sector net debt is projected to decline further in 2003, it will remain high at just over 70% of GDP at year-end 2003 and year-end 2004. Moreover, this path assumes that the government will continue to make strenuous efforts to reach its public sector primary surplus target under the IMF-supported programme (6.5% of GNP), and that real interest rates will continue to decline.
“Despite the government’s repeated declarations of its commitment to the IMF-supported programme and its huge parliamentary majority, it has faced difficulties in adhering to its fiscal and structural reform pledges fully and in a timely manner,” says Al-Yousuf. “Standard & Poor’s assumes that if the government misses its primary surplus targets by a small margin in 2003 and 2004, it will continue to make sufficient progress on structural reforms to maintain a positive market sentiment.”
High real interest rates also constrain the ratings. Forward real interest rates on government debt have declined sharply, but are estimated at about 10%. Further reductions will be more difficult to achieve and will depend on a continuation of current policies beyond the expiry of the IMF-supported programme at year-end 2004. Inflation has continued to decline, but the central bank has not yet deemed the circumstances right to formally adopt inflation targeting.
Nevertheless, real GDP growth should be close to the target of 5% in 2003 and 2004, supported by a rebound in both domestic demand and exports. External liquidity indicators have also improved. Official gross international reserves are at a record high of about US$34bn. The current account is expected to record wider deficits of about 3% of GDP in 2003 and 2.6% in 2004, but the floating exchange rate regime and the cushion of official international reserves significantly mitigate the risk of another crisis. The public sector’s net external debt is projected to continue declining as a ratio of current account receipts (CARs), to about 80% by year-end 2003 and 70% by year-end 2004.
“If the government perseveres with the tough fiscal adjustment despite the local elections due in April 2004 and the expiry of the IMF programme at year-end 2004, the potential for rating improvements will be increased,” says Al-Yousuf. “Conversely, if it abandons the discipline of the programme, then the ratings will come under downward pressure.”