Moody's Investors Service has revised the outlook on Turkey's country ceiling for foreign currency debt to stable from negative, citing the restoration of financial and political stability and the continuing revival of the country's economy. The outlook on the foreign currency bonds of the Republic of Turkey was also changed to stable from negative in line with the country ceiling.
In addition, Moody's revised the outlooks to positive from stable on the B3 country ceiling for foreign currency deposits and the government's B3 domestic currency rating. The rating agency says these actions reflect a trend in favor of reverse dollarization of banking deposits and the improvement in debt dynamics as real interest rates on domestic government securities have fallen sharply.
One of the most important of the structural factors underpinning renewed confidence in Turkey, says Moody's, is the expectation that the European Union's (EU) upcoming Progress Report will give a positive signal to the country regarding the start of its accession negotiations.
Moody's says its rating revisions are also due to the passage of a number of important milestones since the election of the AKP government in November 2002. First, the government renewed the IMF-assisted economic reform program that fell temporarily dormant during the election campaign and the months that followed. Although implementation has not been without its problems, especially — but not limited to — the structural agenda, the continuation of the reform process has supported market confidence.
Growth this year has outperformed the expectations of nearly everyone, including the government, which had predicted a five percent expansion of gross national product (GNP). Inflation appears likely to meet or better the target of 20 percent at year-end, thanks to a strong exchange rate, and official foreign exchange reserves have doubled to about $35 billion at present.
The ratio of gross government debt to GDP is likely to drop another 10-12 percent of GNP this year, following a 20-percentage point decline in 2002. Still, the debt is very large at over 80 percent of GNP and it will probably take at least several more years before the debt ratio will fall to pre-crisis levels of around 50-55 percent of GNP even on current trends.
The rating agency says renewed market confidence reflects the relatively minimal consequences of the Iraq war on the Turkish economy, unlike 1991. Relations with the US government, strained by the Parliament's rejection of US troop deployment on Turkish soil to facilitate the invasion of Iraq, have also been repaired.
Moody's emphasizes that Turkey's situation is not without risks, but that these are consistent with speculative-grade ratings of B1 on foreign currency debt and B3 on government debt/foreign currency deposits.
Turkish politics is always capable of generating shocks that could have negative economic repercussions, says the rating agency, which is concerned that both financial markets and the Turkish authorities may be overly complacent about the durability and depth of the current economic stability.
The agency also worries about the extent to which the debt dynamics have depended upon the appreciation of the exchange rate since a large portion of both the government's domestic and external debt is dollar-denominated. Moreover, the still-unresolved Cyprus issue could delay or derail EU membership prospects for Turkey, leaving it without a solid economic and political anchor when the IMF stand-by program expires. — (menareport.com)
© 2003 Mena Report (www.menareport.com)
