Fitch Ratings has upgraded the Long-term foreign and local currency ratings of the Republic of Turkey to B+ from 'B'. The Short-term rating is affirmed at B, and the Outlook for the Long-term ratings is Stable, stated a press release.
The upgrade reflects progress towards sustaining macroeconomic stabilization, most notably the decline in inflation and interest rates as well as exchange rate stability, underpinned by on-going fiscal consolidation and economic reform under the International Monetary Fund (IMF) program.
Along with strong bilateral and multilateral financial support, and the government's commitment to further economic and political reform necessary to secure agreement from the European Union to begin the accession process, the reform credentials of the government have been strengthened and ameliorated short-term fiscal and external financing concerns.
The fiscal financing outlook for 2004 is relatively benign and it would take a series of major shocks for the government to encounter difficulties in meeting its debt servicing obligations this year.
However, Fitch warns that concerns over the sustainability of public finances remain, including the reliance on "one-off" measures to meet the 6.5 percent of gross national product (GNP) primary surplus target in 2003 and the slow progress of privatization.
Moreover, while the ratio of general government debt to gross domestic product (GDP) declined by some 12 percentage points of GDP to around 77 percent last year, it will require further fiscal reforms and continuing primary surpluses securely to place public finances on a sustainable path. Moreover, while the composition of the government domestic debt stock is encouraging a virtuous cycle at present, the preponderance of exchange-rate and interest-rate linked debt renders public sector solvency and liquidity needs vulnerable to adverse shifts in market sentiment.
A sustained spike in interest rates combined with sharp weakening of the lira would raise the financing needs for this year considerably. It will take a prolonged period of strong budgetary performance and macroeconomic stability to reduce the vulnerability arising from high and volatile public debt and hence finally dispel concerns over medium-term debt-servicing capacity.
The credibility of the government's economic program remains fragile and with the current IMF program due to expire this year, Fitch believes that it will be important to secure a fresh framework to anchor medium-term reform expectations and policy delivery. This could materialize in the form of a new arrangement with the IMF and/or an invitation from the EU to Ankara to commence accession talks.
The outlook for both is uncertain although Fitch expects that some form of relationship with the IMF will be maintained next year and beyond. The Turkish authorities and public are clearly committed to beginning the EU accession process, but despite the promising initiatives on Cyprus and other elements of political reform, there is still much scope for disappointment.
"An unambiguous commitment from EU Heads of State in December to Turkey's accession is not yet our base-case scenario, while even with a clear date accession to the EU will be lengthy and arduous," said Fitch's lead analyst on Turkey, Nick Eisinger. "Nonetheless, a positive decision by the EU regarding Turkey's aspirations to join the EU would enhance, although not guarantee, further structural and fiscal reform and boost private capital inflows necessary to enhance sovereign creditworthiness and Turkey's sovereign credit ratings.” — (menareport.com)
© 2004 Mena Report (www.menareport.com)
