Last week, the Turkish government, led by prime minister Recep Tayyip Erdogan, received a rude awakening when Moodys put 10 of its countrys banks on notice for downgrade, including Garanti and state lender Turkiye Halk Bankasi, citing, in part, potential for asset-quality deterioration.
The fear is the move is a precursor to downgrade the sovereign, which is rated Baa3, the lowest investment-grade rating, with a stable outlook. Moodys is due to make a decision on the countrys outlook on April 11. Standard & Poors bestows Turkey a low investment-grade status at BB+ with a negative outlook, while Fitch gives it a BBB- rating with a stable outlook.
Given Turkeys vulnerability to Fed tapering including the traditionally large stock of foreign ownership of domestic debt, portfolio-financing of its structural current-account deficit and its high-beta currency the recent corruption allegations and local elections on Sunday have undermined foreign-investor sentiment.
|Prime minister Recep Tayyip Erdogan|
As Euromoney has reported, analysts reckon Turkey could fall into a technical recession this year amid higher interest rates to correct imbalances.
While Turkeys asset markets are traditionally de-linked from lagging credit ratings, the government aggressively championed its coveted investment-grade status from Fitch in November 2012, followed by Moodys this time last year. (Traditionally, bond mandates benchmarked to ratings require at least two rating agencies to bestow an issuer investment-grade status before permitting allocations.)
A ratings downgrade, or threats thereof, would be seen as a big blow to the government, therefore. But, according to data from Euromoney Country Risk (ECR), which has more than 400 economists around the world contributing opinions on sovereign risk on a regular basis, this would prove premature.
ECR states that Turkey, with a score of 55.17, remains comfortably ranked in tier three (ranging from 50 to 64.9) of ECRs five-tier system. This is equivalent to a BB+ to A- rating, under the surveys methodology, suggesting economists believe the country presents only moderate risk to foreign trade and investment.
Whats more, Turkeys banking stability indicator, on a score of 6.6 points (out of 10), is the countrys strongest sub-factor score, underscoring analysts confidence in the sector, despite Moodys downgrade threats.
A ratings downgrade would come at an unusual time, given the shift to a more orthodox monetary stance and evidence of domestic rebalancing, while its not clear the political noise is substantially undermining economic policy in the near-term.
Nevertheless, the weakening of institutions and the governments apparent lack of appetite to root out corruption suggests the country could be embracing an Adriatic, rather than northern European, model of development, characterized by a strong executive but weaker rule of law, negative for the sovereigns creditworthiness in the long-term, says Timothy Ash, head of non-Africa emerging markets research at Standard Bank.
In any case, the following chart highlights Turkeys upward ratings trajectory relative to the EU average over the years: