Lira’s wobbles exacerbate Turkey’s credit risk

Turkey has slipped down Euromoney’s Country Risk Survey global rankings to 53rd from 186 sovereigns – falling five places in Q4 2014 – and to little more than half a point higher than Cyprus on a total score of 54.67 out of a maximum 100 points, where a declining score equates to increased risk.

Turkey is within the third of ECR’s five credit groups commensurate with a BB+ to A- rating. The sovereign’s BBB- investment grade rating from Fitch, Ba3 (negative) from Moody’s, and yet BB+ (speculative grade) from S&P highlight how the credit rating agencies remain confused over its prospects.

Falling oil prices are seen as risk-positive to a net energy importer, and will undoubtedly improve the current-account deficit while ushering in lower inflation (for a given exchange rate) – two of the main economic problems Turkey has historically grappled with.

Yet Turkey is suffering from a mix of other economic and political risks, and is viewed as vulnerable to capital outflows as a result.

Consulting director Murat Dikmen and senior manager Basar Yildirim, who are based in Turkey for PwC, recently argued in a briefing paper that “cheaper oil … may increase the country’s appeal to investors”.

“On the other hand,” they add, “… investors will need to monitor if the country engages in measures to sustain structural reforms.”

Other experts have noted in confidence to Euromoney the falling currency negates the effect of lower oil by ramping up the value of external debt Turkey relies on for financing at a time when inward foreign direct investment is waning.

Turkey is also exposed to the geopolitical risks in the Middle East and the Russia-Ukraine crisis weakening its exports, with the all-important eurozone market caught up in the Greek tragedy.

The latest forecasts from the European Commission published last week paint a reasonably bright picture of dissipating inflation and waning imbalances in Turkey, with the fiscal deficit staying below 1.5% of GDP in 2015 and gross debt sliding to less than 35% of GDP.

Yet investment is weak, economic growth low by Turkish standards, and unemployment high –draining public resources.

All five of Euromoney’s surveyed economic indicators, which notably includes exchange rate stability, have deteriorated since the beginning of last year among other political and structural factors.

Political risks piling up

Discussing the difficult internal political situation is largely off-limits for most Turkish-based experts.

Yet political pressure on the central bank to keep interest rates low amid an unwinding of local debt positions risks accelerating capital outflow, and fuelling the lira’s slide and inflation, which could see CDS spreads start to loosen.

Political risk increased virtually across the board in 2014 as all bar one of the six Euromoney survey indicators were marked down by Turkish experts, most of all corruption – the only one scoring less than half the 10 points available.

Uncertainty surrounding president Recep Tayyip Erdogan’s autocratic ambitions to utilize an increased AKP presence in parliament after the upcoming parliamentary elections this June to spur political reforms could see Turkey’s largely ceremonial presidency finally transformed into a new presidential democracy.

It’s a situation Erdogan is clearly planning for, with the news his powerful ally and head of the national intelligence services Hakan Fidan is to stand for parliament, sighting a position of authority.

Such political tail risks are still putting a squeeze on Turkey’s risk score that prevent it from rising through the ranks in line with its evident investor potential, raising constant questions for investors.

This article was originally published by ECR. To find out more, register for a free trial at Euromoney Country Risk.