Turkey holds firm despite capital outflows
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Euromoney Country Risk

Turkey holds firm despite capital outflows

The sovereign’s country risk score is still up on a year ago and its ranking unchanged in the ECR survey.

In contrast to other emerging markets affected by uncertainty surrounding the withdrawal of US liquidity (Fed tapering) and weak export markets, among other factors, Turkey has in the main resisted increased risk, which is all the more remarkable in the light of its social unrest.

On a total score of 56.1, Turkey hasn’t just held its ranking this year – it has climbed eight places since mid-2012, to 48th out of 186 countries surveyed, and has moved comfortably within the third of ECR’s five tiered groups.

Moody’s cottoned on in May by raising the sovereign to Baa3 investment grade, mirroring an earlier move by Fitch.

Turkey’s risks – ranging from an unbalanced economic expansion and credit boom to an over-reliance on short-term portfolio inflows and the need for structural reforms – should not be ignored. That’s why it ranks tier-three and no higher.

However, the risks attached to an increased current-account deficit are counter-balanced to some extent by healthy foreign direct investment inflows, strong growth and an improved fiscal situation over recent years to bring the budget deficit down to more manageable levels.

For now it seems Turkey’s risk outlook is evenly balanced.


A touch above Thailand and South Africa in ECR’s global risk rankings, Turkey’s resilience is as much about other countries falling out of favour as it is about Turkish fundamentals.

The domestic political turbulence that began in May, allied to the US tapering expectation, caused a rise in credit default spreads, capital outflow and downward pressure on the lira that the central bank sought to curtail through higher interest rates.

Turkish experts have downgraded political indicators, notably institutional risk and government stability. However, the latter is still one of three – along with transfer and regulatory risk indicators – still scoring 6.0 or more out of 10.

As ECR expert Arjen van Dijkhuizen, senior economist at ABN Amro, states (Turkey’s structural progress and challenges): “With a heavy elections schedule in 2014 and 2015, it is unlikely that the protest movement will fade out completely. Still, we believe that references to a ‘Turkish Spring’ are overstating the risk to government stability.”


Economic risk factors have hardly budged either, including bank stability, which, aided by a low non-performing loan ratio and healthy capitalization, is unchanged on 6.7.

Van Dijkhuizen adds: “The soundness of the Turkish banking sector has improved substantially since the 2001 financial crisis. Strong capitalization provides a significant cushion against potential asset quality deterioration.”

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