S&P upgraded Turkey’s outlook from negative to stable with a maintain a credit rating of BB which is two notches below the investment grade, citing government policy gradually refocusing on measures to reduce external vulnerabilities. Here we list key takeaways from the report:
- Accepting that it would have a minimal impact, mandatory enrollment of employees aged under 45 in the Private Pension System is considered as an indicator of positive intent.
- Attempts to cut the bill for imported energy are important to the credit rating agency regarding the external balances.
- S&P believes that the government’s reform agenda also targets improving educational standards, increasing labor market flexibility and female participation in the workforce, and reducing the size of Turkey’s sizable informal economy, however, the implementation of this ambitious program of reforms competes to some extent with the president’s intention to bring about constitutional change with the end goal of achieving an executive presidency
- S&P has lowered its estimate of Turkey’s gross external financing requirement for 2016-2019 to close to 170% of current account receipts plus usable reserves, from close to 185%, largely due to the lengthening average maturity of Turkish external debt (which we believe is very important).
- S&P views Turkey’s banking system as generally well capitalized and supervised, noting the size of state-owned banks being relatively large and foreign currency funding represent risks (if their hedges do not hold, due to counterparty risk, or because of the second-round effects of the large open foreign exchange position in the corporate sector on banks’ asset quality).
- S&P could lower its ratings if Turkey’s fiscal performance and debt metrics deteriorate beyond expectations, or if political uncertainty contributed to further weakening in the investment environment or tightening global policy rates intensified balance-of-payment pressures.
- S&P could raise its ratings if sustained rebalancing of the source of economic growth led to much lower external borrowing needs.
The following shows the changes in S&P Global’s estimates on Turkey for the 2016-2019 period.