Standard & Poor's (S&P) Ratings Services has raised its sovereign credit ratings on the Republic of Turkey to B/B from B-/C and granted it a stable outlook. At the same time, the foreign currency ratings on the Export Credit Bank of Turkey were raised to B/B, in line with those on the sovereign, the bank's sole shareholder.
"The upgrade reflects the broad progress that the new government of Turkey has made under its IMF-supported program, albeit with delays and slippages," said S&P's credit analyst Ala'a Al-Yousuf. "The debt burden has continued to decline, due to fiscal adjustment and a fall in real interest rates. This has strengthened confidence in lira assets and helped bolster the exchange rate and international reserves."
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, it will remain high at just over 70 percent of gross domestic product (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 program and that real interest rates will continue to decline.
"Despite the government's repeated declarations of its commitment to the program and its huge parliamentary majority, it has faced difficulties in fully adhering to its fiscal and structural reform pledges," said Al-Yousuf. "Standard & Poor's expects the government to miss its primary surplus targets by about 0.5 percent of GNP in 2003 and 2004, but assumes that it will make sufficient progress elsewhere to maintain a positive market sentiment."
High real interest rates also constrain the ratings. Forward real interest rates on government debt are estimated to be about 20 percent. If these rates persist, then the IMF program could be in jeopardy. Inflation has continued to decline, but the central bank has not yet deemed the circumstances right to formally adopt inflation targeting, despite several postponements. S&P expects CPI inflation to average 28 percent in 2003 and 25 percent in 2004.
Nevertheless, real GDP growth should be at least 4.5 percent in 2003 and 2004, supported by a rebound in both domestic demand and exports. Growth could be higher if, in particular, real interest rates turn out to be lower.
External liquidity indicators have also improved. The public sector's net external debt is projected to continue to decline as a ratio of current account receipts (CARs), to 83 percent by year-end 2003 and 71 percent by year-end 2004.
The current account is expected to record wider deficits of 3.4 percent of GDP in 2003 and 2.6 percent in 2004, but the floating exchange rate regime and the cushion of official international reserves significantly mitigate the risk of another crisis. The gross external financing requirement should remain broadly unchanged through to year-end 2004, at about 145 percent of official reserves.
"If the government perseveres with the tough fiscal adjustment despite the upcoming local elections, the potential for rating improvements would be increased," said Al-Yousuf. "Conversely, if real interest rates do not start declining in the near future, then the IMF-supported program will be in jeopardy, raising the risk of another financial crisis, and
bringing the ratings under downward pressure." — (menareport.com)
© 2003 Mena Report (www.menareport.com)
