Standard and Poor’s 2019 Şubat Türkiye Raporu
- 16 Şubat 2019
- Kripto Muhtar
- Kategori: Blog
Standard and Poor’s Türkiye kredi derecelendirmesinin tam metni aşağıdadır:
OVERVIEW We forecast that output in 2019 will contract by 0.5% in real terms amid tight financing conditions and elevated inflation. In our view, Turkey’s response to financial, and balance of payments, pressures has so far been largely ad hoc, focused more on relieving symptoms rather than on resolving the fundamental economic vulnerabilities.Nevertheless, we believe the authorities still have fiscal room to maneuver given comparatively low net general government debt. We are affirming the foreign currency ratings on Turkey at ‘B+/B’ and the local currency ratings at ‘BB-/B’. The outlook is stable. RATING ACTION On Feb. 15, 2019, S&P Global Ratings affirmed its unsolicited long-term foreign currency sovereign credit rating on Turkey at ‘B+’ and its unsolicited long-term local currency sovereign credit rating at ‘BB-‘. The outlook is stable. We affirmed the unsolicited short-term foreign and local currency sovereign credit ratings at ‘B’. We also affirmed the unsolicited Turkey national scale ratings at ‘trAA+/–/trA-1+’. OUTLOOK The stable outlook reflects balanced risks to our ratings on Turkey over the next 12 months. We could lower our ratings on Turkey if we see an increasing likelihood of systemic banking distress with the potential to undermine Turkey’s fiscal position. Key indicators of this could include a rise in corporate loan book default rates in excess of our current forecast, difficulties rolling over banks’ foreign funding, or domestic deposit withdrawals. We could also lower our ratings if Turkey’s economic growth weakens materially beyond our projections, for example through a combination of persistently high inflation and tight domestic financing conditions. We could consider an upgrade if the government successfully devises and implements a credible and transparent economic adjustment program that bolsters confidence in Turkey’s banks and economy, while reducing balance-of-payments risks and bringing inflation under control. RATIONALE Our ratings on Turkey remain constrained by its weak institutions. There are limited checks and balances between government bodies, raising questions about Turkey’s ability to address the challenging environment for its financial sector and broader economy. Following the June 2018 elections, power remains firmly in the hands of the executive branch, with future policy responses difficult to predict. As capital inflows into Turkey dried up last year, the lira weakened substantially and the historically high current account deficit was forced into surplus. Imports fell notably as domestic purchasing power reduced in foreign currency terms. Despite the current account shifting into surplus, we believe Turkey’s balance-of-payments risks remain elevated and therefore constrain the sovereign ratings. This is principally due to the need to refinance a high stock of external private sector debt, which we estimate amounts to about 40% of 2018 GDP. The repayment schedule for this debt is front-loaded with almost half maturing in the next 12 months. We consider this a risk given what we view as only limited foreign exchange reserves at the Central Bank of the Republic of Turkey (CBRT). The ratings remain supported by Turkey’s comparatively low net general government debt burden, thanks to past economic policies. We think the government still has some fiscal flexibility that should help absorb the consequences of an ongoing economic adjustment. Nevertheless, a combination of support for public-private partnerships, weaker economic growth, and possible external deleveraging in the private sector could rapidly erode what today appears to be a sound public balance sheet. Institutional and Economic Profile: Turkey will feel the consequences of the 2018 currency crisis with output contracting and high inflation this year We expect the Turkish economy to contract by 0.5% this year, although there are major uncertainties surrounding this forecast.Weak growth dynamics are mainly due to domestic demand. Both consumption and investments will reduce while net exports make a positive contribution to growth.Turkey’s institutional environment remains weak, with limited checks and balances. Turkey is gearing up for the March 2019 local elections and we don’t expect any reform or policy initiatives until these are over. Turkey has entered a period of stagflationary adjustment and we expect GDP to contract by 0.5% in real terms in 2019. This will mark the first full-year output contraction since 2009. It follows a period of overheating of the domestic economy, which abruptly ended with the currency crisis in August 2018. Even though financial market sentiment has improved and the lira has regained some ground since then, we still expect the consequences will weigh on Turkey’s economic prospects in the near to medium term. High-frequency indicators point to a pronounced slowdown in economic activity. According to Turkstat, the Turkish economy grew by 1.6% year-on-year in the third quarter of 2018, a major deceleration compared to 6.0% growth in the first half of the year. We estimate that the economy contracted by 2.5% in the final months of last year. Several indicators inform our view: A decline in domestic orders of manufacturing firms in the fourth quarter of 2018;Industrial production and PMI indices hitting multi-year lows;Reduced consumer confidence; andA substantial decline in imports.We expect that domestic demand will remain weak and will be a major contributor to Turkey’s weak growth performance this year. Following extreme currency volatility in 2018, inflation spiked–surpassing 25% in October 2018 and marking a 15-year high. Even though it has now somewhat reduced, inflation remained above 20% in January 2019. As high inflation will erode incomes, we believe that consumption will likely decline by 2% this year. In our view, government initiatives to temporarily boost domestic demand through lower taxes will have only a limited effect. In addition, we believe that headline inflation likely underestimates the full impact on consumer purchasing power. For instance, food inflation exceeded 30% toward the end of 2018, straining the budgets of lower income households. We also forecast that investments–an important previous growth driver–will decline by 5% this year. The Turkish corporate sector remains in a short foreign-exchange position that the CBRT estimates at about 30% of GDP. Consequently, last year’s pronounced exchange-rate weakening has increased the burden of servicing this debt. Combined with much tighter domestic financing conditions, partly due to CBRT interest rate hikes, there is limited scope for investment activity. Funding pressures are exacerbated by weak consumer demand, which limits firms’ ability to pass higher prices to domestic consumers. Companies also face cost pressures, including a 26% hike in the minimum wage. Our base-case economic scenario, described above, is largely unchanged from six months ago and remains subject to considerable uncertainty. We currently project output contraction to be much milder than the 5% recession Turkey experienced in 2009. This is because, unlike 2009, external conditions are broadly favorable this time around with Turkey’s trade partners forecast to continue growing. Net exports have so far supported economic dynamics, cushioning subdued domestic demand. Should growth in Europe decelerate or trade wars escalate materially, the adjustment for the Turkish economy could prove more painful. We also see some potential upside stemming from a more consistent government policy response to Turkey’s economic challenges. This could happen after the March 2019 local elections. Beyond 2019, we believe Turkey’s growth prospects could improve. We note that Turkey’s economy is large and diverse, characterized by a highly flexible SME sector, a strategic geographic location, and a young and growing population. Some export-oriented sectors, particularly tourism, have been doing well recently because of competitiveness gains due to the weaker lira. Nevertheless, we expect recovery from the current downturn to be slower compared to pre-2018 growth rates. In our view, absent substantial reform momentum coupled with reduced political uncertainty, faster recovery will be difficult to achieve. Turkey’s institutional arrangements have eroded substantially in recent years and are a major constraint for the sovereign ratings. In last year’s June presidential and parliamentary elections, the president and the Adalet ve Kalkinma Partisi (AKP)-led coalition secured a victory that was the final chapter in Turkey’s transition to an executive presidential system. As a consequence, we expect the executive branch will dominate future decision-making, sidelining the few checks and balances that had remained in place, including, by potentially increasing, off-balance-sheet financial activities. In our view, this high centralization of power has left Turkey ill-prepared to deal with the fallout from last year’s balance-of-payments shock. We view the response so far to last year’s currency crisis as ad hoc, rather than coordinated and consistent. The focus has been on addressing the symptoms, rather than the underlying causes, of Turkey’s economic problems. The important exception to our assessment that the policy response has been reactive, rather than proactive, was the CBRT’s decision to hike the one-week repurchase agreement (repo) rate by 6.25 percentage points on Sept. 13, 2018. We consider this move to have been instrumental in stabilizing the exchange rate. Turkey has been in a constant electoral cycle over the last three years and remains so: local elections are coming up in March 2019. Given the likely tight race in at least some of the constituencies, including Ankara, we foresee possible further concessions to the electorate as the ruling AKP seeks to shore-up support. To this end, we note the government’s decision to temporarily lower some taxes until the end of March 2019 alongside a hike in the minimum wage. We do not expect any major policy or structural reform initiatives until the local elections are over. We also do not anticipate that Turkey will sign up to an International Monetary Fund program, before or after the upcoming polls, except if far more difficult external financing conditions arise. We continue to see risks stemming from Turkey’s international relations. Even though interactions with the U.S. have improved following the earlier release of a detained U.S. citizen, multiple points of contention remain. U.S. policy toward Turkey has also become less predictable than in the past. Tensions between the two countries include Turkey’s alleged role in allowing Iranian counterparties to evade American sanctions including by using state-owned financial institutions, the Turkish government’s decision to purchase S-400 surface-to-air missiles from Russia, and its open support of the regime of Venezuelan President Maduro, whom the U.S. has openly denounced. Regional security also remains a concern. Apart from geopolitical repercussions, any deterioration could decrease tourism flows. This could happen if tensions in Syria were to escalate or if there was an increased domestic terrorist threat, for instance, due to Turkish military operation against the YPG in Syria. Flexibility and Performance Profile: Despite a turnaround in the current account, balance-of-payments risks remain elevated, but the government still has fiscal room to maneuver Despite the turnaround in the current account, balance-of-payments risks persist due to the sizable stock of external debt with a front-loaded maturity schedule.In our view, the authorities still command fiscal space given that net general government debt was 26% of GDP at end-2018, which is favorable in a global comparison.We forecast inflation to remain at a 15-year high, averaging 16% in 2019.Last year’s currency crisis notably affected Turkey’s balance of payments. Following years of sizable deficits (averaging 5% of GDP in 2013-2017), the current account switched to a surplus in a matter of weeks in August 2018. This primarily reflects the substantial depreciation of the lira, which saw imports collapse. It also reflects the reduced availability of external financing. Rather than a rebalancing, we view this as a forced disruptive adjustment pointing to a major contraction in domestic economic activity. Although the lira exchange rate had recovered some ground by end-2018, imports remained depressed and the current account continued to post monthly surpluses through November (latest available data). We note that sudden and pronounced swings in external flows from deficit into surplus have historically been associated with major economic contractions, not only in Turkey, but also in other regions and countries (Eastern Europe, Iceland, and elsewhere). Despite imports providing the main impetus behind the current account turnaround, export performance was a bright spot in 2018 with volumes growing by an estimated 7%. In 2018, tourism arrivals hit an all-time high. One major question for 2019 is whether the pace of export growth can continue, particularly if the economies of Turkey’s West European trade partners exhibit a sharper deceleration than we presently anticipate. Despite a significant turnaround in Turkey’s external flows, we still view balance-of-payments risks as elevated. This is mainly because years of past external shortfalls have led to a substantial increase in private sector external debt to 40% of GDP at the end of last year, from 25% in 2010. This accumulated debt is characterized by a front-loaded repayment schedule, with almost half maturing over the next 12 months. Of this, close to 60% pertains to the country’s banking system. We previously highlighted downside risks to banks’ foreign debt refinancing (see “Turkey Long-Term Foreign Currency Rating Lowered To ‘B+’ On Implications Of Extreme Lira Volatility; Outlook Stable,” published Aug. 17, 2018). Positively, and in line with our base case, banks were able to roll over much of their external debt coming due last autumn, even though the cost has risen substantially. According to CBRT estimates, the rollover ratio declined to 80% by the end of last year. That said, we understand that some banks did not refinance maturing debt, not because they lost market access but because credit demand was rapidly declining and the outlook for lending was weakening. We currently expect some deleveraging in the banking sector in 2019 with an external debt rollover ratio of 80%-90% for the rest of the year. Downside risks remain, for example if domestic residents lose confidence in the financial system or if foreign financing dries up, significantly reducing rollover ratios. If this happens, Turkey’s economic adjustment will likely be more pronounced than the 0.5% output contraction we are currently projecting. The exchange rate would then likely further correct, while consumption and investment would sharply decline. We view the CBRT’s buffers to counter a potential deterioration in balance of payments as limited. Although headline foreign exchange reserves amounted to US$93 billion at the end of 2018 (12% of GDP), a large proportion pertains to the CBRT’s liabilities in foreign currency to the domestic banking system. This reflects the required reserves on banks’ foreign-exchange deposits as well as liabilities under the reserve option mechanism. The latter allows commercial banks to maintain some of their required reserves related to Turkish lira deposits in foreign currency. Excluding these, we estimate the CBRT’s net reserves are a much smaller, US$40 billion (5% of GDP). In contrast to the balance of payments, Turkey’s fiscal position remains supportive of the sovereign ratings. Historically, the government ran recurrent fiscal deficits, but these have been contained, averaging only slightly higher than 1% of GDP over the last five years. We estimate that last year’s deficit was 2.5% of GDP, lower than we previously forecast. We expect a mild widening of the deficit this year, mainly due to weaker economic growth. Nevertheless, shortfalls will remain contained at below 3% of GDP over the forecast horizon. Consequently, net general government debt should hover around 25% of GDP, which compares well globally. Beyond the headline figures, Turkey’s underlying fiscal position has somewhat deteriorated in our view. We note that last year’s stronger fiscal outturn was bolstered by a series of one-off revenue measures including the tax amnesty and the introduction of permission for citizens to opt out of military service, for a fee. This trend has continued in 2019. For example, the CBRT decided to bring forward the payment of a large dividend (1% of GDP). The CBRT made a profit in 2018 because foreign-exchange reserves were revalued in local currency terms, owing to the lira’s depreciation. We also see risks from various potential government off-balance-sheet commitments, such as those stemming from public-private partnerships (PPPs). We understand the PPPs are administered by different government bodies and there are no consolidated published statistics. It is, however, unlikely that the maximum theoretical government exposure to PPPs and guarantees extended exceeds 10% of GDP. Despite the aforementioned risks, the government still has policy space to leverage the public balance sheet if needed, in our view. Such a need could arise, for example, if the government were called to support parts of the banking system through recapitalizing individual institutions or undertaking a broader sector clean-up by moving nonperforming assets to a “bad bank.” In our view, risks to the stability of the Turkish banking system have risen substantially over the last 12 months. These stem from more difficult domestic and foreign financing conditions, and a likely deterioration in asset quality. We revised our assessment of contingent liability risks to the state from the banking system to moderate from limited in August 2018. So far the authorities have not provided any concrete plans as to how they might deal with a deterioration in bank asset quality, although we understand that the “bad bank” option has not been ruled out. The New Economy Program published in September 2018 lacked specific details on resolving banking sector problems bar a reference to an asset quality review. Such a review was undertaken by Turkey’s Banking Regulation and Supervision Agency (BRSA) in December, but the details have not been made public. Official nonperforming loans are around 4.5% of system loans, which we think underestimates existing credit risk. We forecast that problem loans will increase, rising to double digits over the next two years. In our view, Turkey’s monetary policy has been historically ineffective in managing inflation. The CBRT has never met the 5% medium-term target that was introduced in 2012, while the real effective exchange rate has shown substantial swings. The CBRT has faced increasing political pressure in recent years, which in our view is impairing its effectiveness, often by delaying timely responses to rising inflation, which soared to 25% in October 2018 and has remained above 20% since then. Although the CBRT has maintained the key repo at a very high 24% since September, questions remain over its future policy direction. We expect the CBRT to start reducing interest rates this year as inflation declines, but long before it approaches the target rate. In our view, political pressure for doing so will likely persist, particularly amid a slump in economic activity. We also note that the CBRT declared an extraordinary early dividend of Turkish lira (TRY) 33.7 billion (around 1% of GDP) payable to the Treasury. It remains unclear whether this payment could help fund additional short-term fiscal stimulus, but we anticipate that it could flatter headline fiscal data this year. The long-term local currency rating on Turkey is one notch higher than the long-term foreign currency rating. In our view, the floating exchange rate regime, comparatively developed local currency capital markets, and the fact that about 50% of government debt is denominated in local currency and almost entirely held domestically imply a lower default risk on Turkey’s lira-denominated sovereign commercial debt compared to its foreign currency-denominated debt. This is also premised on our expectation that Turkey will continue to fund a large share of its financing needs in the local currency debt capital markets and that the process will be transparent and driven by market forces.