In a press release issued yesterday, Moody's revealed that it had increased Turkey's government bond rating by one notch from Ba2 from Ba3, also changing its outlook for the rating from stable to positive. This move is the first upgrade in Moody's bond rating for Turkey in more than four years, reflecting the agency's confidence in government policy during the sharp economic contractions of 2009.
The last upgrade to the rating occurred on Dec. 14, 2005, when the rating increased from B1 to Ba3.
“Although Turkish growth has contracted very sharply -- even more sharply than was seen in its 2001 financial crisis -- the resilience of the public finances relative to past such crises has been notable,” said Sarah Carlson, the lead analyst for Turkey in Moody’s Sovereign Risk Group. “The ability of the government and the country more generally to regroup when faced with a very significant economic and financial challenge indicates that Turkey has reached a higher level of resiliency -- which is what our ratings ultimately reflect.”
Carlson called the 2009 financial crisis a “stress test” of policy reforms enacted in the greater part of the decade. She added that Turkey’s ability to rebound from external or domestic shocks is the result of an improvement in policy credibility during this period.
Speaking of the passage of the 2010 budget, Carlson said it was in line with the government’s medium-term economic plan and that it “represents a first in a three-year plan towards reining in the budget deficit and returning the budget to a primary surplus position.” She added that a budget surplus could be achieved under this framework “barring election-related spending setbacks.”
Moody’s long-term outlook on Turkey’s growth was also positive, though it noted that growth is not likely to resume at the pace achieved in the mid-2000s “due to global and local factors.” The agency also applauded Turkish industry’s ability to expand into new export markets and therefore reduce its dependence on EU countries.
Fiscal rules needed
Despite the positive outlook on Turkey, Carlson cautioned that Turkey continues to face risks. According to Carlson, its debt affordability metrics are still poor by international standards, with interest/revenues estimated at 27 percent and debt/revenues at 219 percent in 2009. She also noted that Turkey needs more robust policy rules that would instill additional discipline to the budget process. “A fiscal rule targeting ongoing budget restraint would enhance the Turkish authorities’ fiscal credibility, particularly given the slippage that occurred even prior to the onset of the crisis and the absence of an external anchor like the [International Monetary Fund] IMF or EU,” she said.
In a related rating action, Moody’s also raised the foreign currency bank deposit ceiling from B1 to Ba3 and the local currency bank deposit ceiling to A2 from A3. The outlooks on both are stable. The İstanbul Stock Exchange’s İMKB-100 benchmark index ended the first session of trading on a slightly positive note yesterday after the announcement at 55,041.93, an increase of 0.1 percent from closing on Thursday.