Scope Ratings GmbH (Scope) monitors and reviews its credit ratings on an ongoing basis and at least annually, or every six months in the case of sovereigns, sub-sovereigns and supranational organisations.

Scope performs monitoring reviews to determine whether material changes and/or changes in macroeconomic or financial market conditions could have an impact on the credit ratings. Scope considers all available and relevant information when undertaking the monitoring review.

Monitoring reviews are conducted by performing a peer comparison, benchmarking against the rating-change drivers, and/or reviewing the credit ratings’ performance over time, as deemed appropriate by the Lead Analyst or Analytical Team Head, in addition to an assessment of all aspects of the relevant methodology/ies, including key rating assumptions and model(s). Scope publicly announces the completion of each monitoring review on its website.
 
Scope completed the monitoring review for the Republic of Türkiye (B-/Negative (long-term foreign-currency issuer and senior unsecured debt ratings), B/Negative (long-term local-currency issuer and senior unsecured debt ratings), S-4/Stable (short-term issuer ratings in foreign- and local-currency) on 24 August 2022.

This monitoring note does not constitute a credit rating action, nor does it indicate the likelihood that Scope will conduct a credit rating action in the short term. Information about the latest credit rating action connected with this monitoring note along with the associated rating history can be found on www.scoperatings.com.

Key rating factors

Türkiye’s long-term sovereign ratings are challenged by: i) severe external-sector vulnerabilities, including structural current-account deficits, significant exposures to lira depreciation, periods of capital outflows and inadequate foreign-currency reserves; and ii) central bank and structural economic policies that are inconsistent with assurance of the Turkish economy’s long-run sustainability. Evolving vulnerabilities, associated with structurally loose monetary policy, high inflation, negative net foreign assets as well as elevated and rising sovereign FX exposure, raise risks to the sovereign’s repayment capacity in case of further lira depreciation.

The economic challenges will likely interact over a forthcoming period with institutional challenges in the context of scheduled 2023 presidential and parliamentary elections. Recent polls indicate that the President Recep Tayyip Erdoğan lags significantly behind potential presidential candidates of the main opposition Republican People’s Party. The risk of heightened domestic political tensions in the context of the forthcoming elections adversely affects the credit outlook.

Concurrently, Türkiye’s ratings are supported by multiple strengths underlying the sovereign’s credit profile, reflecting: i) comparatively moderate levels of government debt; ii) a resilient banking system able to supply liquidity to the sovereign; and iii) a large, diversified economy as well as comparatively elevated medium-run growth potential. However, Scope views the lira savings scheme as gradually weakening one of Turkey’s key credit strengths – the health of the sovereign balance sheet – to temporarily slow lira declines while retaining accommodative monetary policy settings.

The Negative Outlook represents Scope’s view that risks to the sovereign ratings are tilted to the downside over the next 12 to 18 months.

The foreign- and/or local-currency rating(s) could be downgraded if, individually or collectively: i) macroeconomic stability is further undermined due to further deterioration in external finances, more severe balance of payment and/or financial pressures; ii) central bank and structural economic policies remain inadequate, resulting in deepening of long-run macroeconomic imbalances; and/or iii) a severe domestic political pressure and/or a deterioration in security conditions and international relations accentuate market turbulence and external risk.

Conversely, the rating Outlook(s) could be revised to Stable if, individually or collectively: i) the country’s external vulnerabilities are curtailed, due, for example, to a sustained improvement in international reserves, improved capital flows and a narrowing of structural current account deficits; ii) credible monetary and economic policies support a rebalancing of the economy, enhance policy predictability and sustainably reduce inflation; and/or iii) domestic political pressures eased.

For the updated scorecards accompanying this review, click here.

The methodology applicable for the reviewed rating(s) and/or rating Outlook(s) (Sovereign Ratings Methodology, 8 October 2021) is available on https://scoperatings.com/governance-and-policies/rating-governance/methodologies.
This monitoring note is issued by Scope Ratings GmbH, Lennéstraße 5, D-10785 Berlin, Tel +49 30 27891-0.
Lead analyst: Levon Kameryan, Associate Director.

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