Scope Ratings reviews its ratings either yearly, or at least every six months in the case of sovereigns, sub-sovereigns and supranational organisations. Monitoring reviews are unrelated to the calendar that outlines public finance rating actions.

Scope performs monitoring reviews to determine whether outstanding ratings remain proportionate. Monitoring reviews are conducted either by performing a portfolio review in terms of the applicable methodology/ies, latest developments, and the rated entity’s financial and operational aspects relative to similarly-rated peers; or through targeted reviews on an individual credit. Scope publicly announces the completion of each monitoring review on its website.

Scope completed the monitoring review for the Republic of Turkey (B/Negative (long-term foreign-currency ratings), B+/Negative (long-term local-currency ratings), S-4/Stable (short-term ratings in foreign- and local-currency)) on 10 September 2021. This monitoring note does not constitute a rating action nor does it indicate the likelihood of a credit rating action in the short term. The latest information on the credit ratings in this monitoring note along with the associated ratings history can be found on www.scoperatings.com.

Key rating factors

Turkey’s long-term sovereign ratings are challenged by: i) long-run deterioration in the sovereign’s capacity to service debt outstanding especially in foreign currency, due to inadequate foreign-currency reserves; ii) severe external-sector vulnerabilities, including structural current-account deficits, significant exposures to lira depreciation and periods of capital outflow; and iii) monetary and fiscal policies that are inconsistent with assurance of the Turkish economy’s long-run sustainability.

Earlier this year, President Recep Tayyip Erdoğan dismissed central-bank governor Naci Ağbal, signalling a sudden change in leadership at the monetary authority, underlining Erdoğan’s wish for looser monetary policies in support of high growth. Under new Governor Şahap Kavcıoğlu, a weaker lira, rising inflation and still elevated credit growth have not been met with the same degree of proactiveness in the central bank response and, instead, Turkey’s significant macroeconomic imbalances have been exacerbated rather than counteracted by overly loose central bank policy.

The credit strengths of Turkey include: i) still-comparatively-moderate levels of central government debt despite increases during recent years, ii) a well-capitalised and resilient banking system able to provide significant liquidity to the sovereign, and iii) a lesser sensitivity of Turkey’s local-currency-denominated government debt to economic vulnerabilities linked to inadequate foreign-currency reserves, risks from currency depreciation and exits of foreign investors, as well as from elevated rates of inflation. In addition, a large, diversified economy and high medium-run growth potential remain credit strengths.

The Negative Outlook represents Scope’s opinion that risks to the sovereign ratings are skewed to the downside. The ratings/Outlooks could be downgraded if, individually or collectively: i) macroeconomic stability were undermined due to deterioration in external sector stability and/or a more severe balance of payment crisis is witnessed; ii) fiscal, central bank and structural economic policies remain inadequate, resulting in greater macroeconomic imbalances; and/or iii) institutional degradation, geopolitical tensions or renewed security concerns arise, sparking market turbulence, accentuating Turkey’s external-sector vulnerabilities.

Conversely, the rating Outlook(s) could be revised to Stable if, individually or collectively: i) credible monetary, fiscal and economic policies were adopted, returning comparative stability to the currency and supporting a credible rebalancing of the economy; ii) the country’s external vulnerabilities are curtailed; and/or iii) the deterioration in Turkey’s governance framework is reversed and/or geopolitical tensions are reduced.

For the updated scorecards accompanying this review, click here.

The methodology applicable for the reviewed rating(s) and/or rating Outlook(s) (Sovereign Ratings, 9 October 2020) is available on https://www.scoperatings.com/#!methodology/list.
This monitoring note is issued by Scope Ratings GmbH, Lennéstraße 5, D-10785 Berlin, Tel +49 30 27891-0.
Lead analyst: Dennis Shen, Director.

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