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 14 February 2023.

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 exposure to exchange-rate risk, capital outflows and an inadequate level of net international reserves; and ii) central bank and economic policies that are inconsistent with the Turkish economy’s long-run sustainability.

In Scope’s view, Türkiye’s unconventional and increasingly interventionist policy mix has raised risk to external and public finances, while failing to restore currency stability or sustainably rebuild foreign-exchange buffers. Evolving vulnerabilities, including structurally loose monetary policy despite high inflation, negative net foreign assets of the central bank, elevated private and public foreign-currency exposure and tightening sovereign-banking nexus are downside risks to the ratings.

The economic challenges will likely interact over a forthcoming period with institutional challenges in the context of the upcoming presidential and parliamentary elections, with elevated uncertainty regarding policy choices post-elections. The risk of heightened domestic political tensions and exposure to geopolitical risks further challenge the credit outlook.

Concurrently, Türkiye’s ratings are supported by strengths underlying the sovereign’s credit profile, reflecting: i) comparatively moderate levels of government debt; ii) a sound banking system able to supply liquidity to the sovereign; and iii) a large, diversified economy with comparatively strong medium-run growth potential.

We expect that the February earthquakes will have an adverse impact on growth and inflation in 2023 given production disruptions and supply shortages in the affected regions which generate around 10% of Turkish GDP, with a substantial on-off fiscal cost to the budget.

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 accounts, more severe balance-of-payment pressures and/or a curtailed financial strength of the banking system; ii) the predictability of public policies further declines, exacerbating macroeconomic imbalances; and/or iii) severe domestic political pressure and/or an acute 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 reduced, due, for example, to a sustained improvement in net international reserves, improved capital inflows and a narrowing of structural current-account deficits; and/or ii) the predictability of public policies and the effectiveness of monetary policy are enhanced, supporting a rebalancing of the economy and sustainably reducing inflation.

For the updated scorecards accompanying this review, click here.

The methodology applicable for the reviewed rating(s) and/or rating Outlook(s) (Sovereign Ratings, 27 September 2022) 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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