Fitch affirms Turkey at 'BBB-'; outlook stable

Reuters

LONDON, October 24 (Fitch) Fitch Ratings has affirmed Turkey's Long-term foreign

and local currency Issuer Default Ratings (IDRs) at 'BBB-' and 'BBB'

respectively. The issue ratings on Turkey's senior, unsecured foreign and local

currency bonds are also affirmed at 'BBB-' and 'BBB' respectively. The Outlooks

on the Long-term IDRs are Stable. The Country Ceiling is affirmed at 'BBB', and

the Short-term foreign currency IDR at 'F3'.

KEY RATING DRIVERS

The affirmation reflects the following factors:

Fitch believes that Turkey's sovereign creditworthiness remains resilient to

recent shocks, notwithstanding its heavy reliance on net capital inflows in lieu

of low domestic savings. While this key rating weakness leaves Turkey vulnerable

to swings in global investor sentiment, it is mitigated by Turkey's underlying

credit fundamentals: a strengthening sovereign debt profile, a robust banking

system, a relatively deep domestic capital market and a dynamic private sector.

These shock absorbers enhance Turkey's ability to deflect bouts of financial

uncertainty and global investor unease without impairing sovereign

creditworthiness.

Turkey has suffered a sharp slowdown in net capital inflows since May 2013, as

uncertainty about the future direction of US monetary policy coincided with

unexpected domestic political and social unrest and some escalation in regional

tensions. These developments have led to a sharp depreciation of the exchange

rate, some loss of international reserves and a repricing of Turkish risk.

Nonetheless, Fitch judges that these adverse developments remain within the

tolerance of Turkey's 'BBB-'/Stable sovereign rating.

Turkey's large current account deficit (Fitch forecasts it at 7.4% of GDP in

2013), funded almost wholly by short-term and portfolio capital inflows, renders

it vulnerable to sudden changes in global investor sentiment and its

international liquidity ratio (76%) falls well short of the 'BBB' median (138%).

Still, Turkey is no stranger to external shocks. External financing proved

remarkably resilient through the Lehman and eurozone debt crises. Similarly,

balance of payments data through August 2013 indicate that the current account

deficit (CAD) remains fully financed on a 12-month rolling basis, borne out by

the modest increase in international reserves of USD5bn since July to

USD108.6bn.

Fitch considers that the combination of a wide CAD, high inflation (7.9% y-o-y

in September) and weak international liquidity pose difficult policy challenges

for the authorities when set against a predilection for higher growth and a less

benign global financing environment. In this context, we find the official

growth, inflation and current account projections contained in the latest

medium-term programme (MTP) for 2014-16 somewhat optimistic. However, we would

expect the authorities to adjust domestic policy settings in a timely manner to

avert a more disruptive shock to economic stability.

Public finances are a key support for Turkey's sovereign ratings. General

government deficits should remain around 2% of GDP and gross general government

debt (GGGD) of 36.4% of GDP is exactly aligned with the 'BBB' median. Active

debt management has extended out maturities, reducing prospective fiscal funding

needs to around 9% of GDP in 2014-15, while the FX share of GGGD has fallen to

30% from 60% over the past decade. The MTP notes that the central government

deficit should come in at 1.2% of GDP in 2013, well below target (2.2%), and

charts a conservative fiscal stance through 2016. Even so, Fitch notes that

central government expenditure has ratcheted up aided by buoyant revenues

(including privatisation receipts) and lower debt service costs, and could prove

difficult to rein in, in the face of a sharp economic slowdown.

Fitch is forecasting slower real GDP growth of 3.2% in 2014, down from an

expected 3.7% in 2013, as the economy adjusts to a repricing of Turkish risk and

bank lending growth slows from a still high 22% at present. Fitch does not

expect a prolonged slowdown in net capital inflows: sovereign market access

remains intact, while banks and corporates report continuing high roll-over

rates, albeit at shortening maturities. However, Turkey's non-bank private

sector remains the most exposed to interest rate and exchange rate shocks and

higher debt service costs can be expected to feed through to lower private

investment and growth.

Political risk has risen following the outbreak of anti-government protests in

May and developments in neighbouring Syria and further uncertainty can be

expected to accompany local and presidential elections in 2014-15. Still, Fitch

notes that relatively low scores on political stability and voice accountability

are already factored into Turkey's sovereign ratings, while parallels with the

Arab Spring should not be overplayed. Turkey has a democratically elected

government with a strong majority that has delivered on much of its original

mandate over three electoral terms.

Turkey's sovereign ratings are supported by its favourable medium-term growth

prospects supported by demographic trends, deepening local capital markets,

strong debt management capacity, a respectable debt service record and a dynamic

private sector.

RATING SENSITIVITIES

The Stable Outlook reflects the fact that in Fitch's view, upside and downside

risks to the rating are balanced. The main factors that individually or

collectively might lead to rating action are as follows:

Positive:

- A material and durable reduction in the current account deficit, coupled with

a rebalancing of net capital inflows towards longer-term instruments and a

sustained increase in international reserves

- A track record of lower and more stable inflation

- Structural reforms that raise gross domestic savings and attract greater

foreign direct investment

Negative:

- A sharp, sustained downturn in capital inflows which has a material adverse

impact on economic and financial stability, including a deterioration in public

finances and a reversal of Turkey's favourable public debt dynamics

- A material increase in net external debt over the medium term, related to

rapid credit growth and continuing large current account deficits

- A major political shock with a material adverse impact on the macroeconomic

outlook

KEY ASSUMPTIONS

Turkey's ratings are based on a number of key assumptions:

- Fiscal outcomes are broadly in line with the Turkish government's MTP for

2014-16, consistent with a declining GGGD/GDP ratio

- US Federal Reserve 'tapering' proceeds in an orderly manner such that there is

no 'sudden stop' of capital flows to countries like Turkey with large CADs

- International oil prices evolve broadly in line with Fitch's projections of

USD100/bbl in 2014-15

Contact:

Primary Analyst

Paul Rawkins

Senior Director

+44 20 3530 1046

Fitch Ratings Limited

30 North Colonnade

London E14 5GN

Secondary Analyst

Gergely Kiss

Director

+44 20 3530 1425

Committee Chairperson

Andrew Colquhoun

Senior Director

+852 2263 9938

Media Relations: Peter Fitzpatrick, London, Tel: +44 20 3530 1103, Email:

peter.fitzpatrick@fitchratings.com.

Additional information is available on www.fitchratings.com

Applicable criteria, 'Sovereign Rating Criteria' dated 13 August 2012 and

'Country Ceilings' dated 09 August 2013, are available at www.fitchratings.com.

Applicable Criteria andALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS.

PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK:

HTTP://FITCHRATINGS.COM/UNDERSTANDINGCREDITRATINGS. IN ADDITION, RATING

DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S

PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'. PUBLISHED RATINGS, CRITERIA AND

METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF

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AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF

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SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS

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ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH

WEBSITE.

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