London, 20 November 2012 -- In its annual credit report on Turkey, Moody's Investors Service says that the country's Ba1 rating and positive outlook reflects the significant improvement in the country's public finances and the resulting increased shock-absorption capacity of the government's balance sheet, although it is constrained by a high susceptibility to event risk due to the size of the country's external imbalances.
The rating agency's report is an annual update to the markets and does not constitute a rating action.
Moody's determines a country's sovereign rating by assessing it on the basis of four key factors -- economic strength, institutional strength, government financial strength and susceptibility to event risk -- as well as the interplay between them.
Historically a rating constraint, Turkey's government's financial strength has improved steadily over the past decade, which can be seen across a wide range of financial metrics such as debt/revenue and debt affordability. Although the international economic environment has become more challenging and Turkish domestic growth is slowing, Moody's expects that the primary balance will remain in surplus and that debt levels will continue to decline for the next 3-4 years. Even in the rating agency's adverse scenario, which includes more pessimistic outcomes for nominal GDP growth, the primary balance, and interest costs, Turkey's debt burden is likely to decline slightly over the next two years.
Moody's notes that Turkey's resilience to economic, financial, and political vulnerabilities has been strengthened considerably in recent years, as evidenced by the financial markets' ability to endure volatile capital flows and ongoing tension between the society's secular and religious elements. Although Turkey's susceptibility to event risk is high due to the size of Turkey's external imbalances, the government adopted a number of policies in the first half of 2012 (e.g., an improved investment incentive scheme and increased incentives for individuals to pay into individual pensions) that have the potential to address some of the root causes of Turkey's external imbalances. Nevertheless, given the structural nature of these imbalances it will take time to be fully addressed. Moreover, geo-political tensions remain a concern, as they could increase international investors' risk aversion and make it more difficult to finance the current account deficit.
Moody's assessment of whether Turkey can attain an investment-grade rating will be driven by the balance between the greatest risks facing the country, particularly vulnerability to balance-of-payment shocks, against the buffers that could help to maintain the country's creditworthiness if those balance-of-payment risks were to crystallise.
The positive outlook on Turkey's sovereign bond rating, which reflects Moody's expectation that Turkey's resilience will continue to improve, would likely be moved to stable if progress on addressing external vulnerabilities were to be reversed. A material deterioration in the government's public-finance metrics would also result in downward movement in the outlook or, in extremis, in the rating itself. Although not likely given the country's improved resilience, a sudden and sustained stop in foreign capital flows would also exert downward pressure on the ratings.
Moody's annual credit report on Turkey is now available on www.moodys.com.
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Sarah Carlson VP - Senior Credit Officer Sovereign Risk Group Moody'sInvestors Service Ltd. One Canada SquareCanary WharfLondon E14 5FA United Kingdom JOURNALISTS: 44 20 7772 5456 SUBSCRIBERS: 44 20 7772 5454 Bart Oosterveld MD - Sovereign Risk Sovereign Risk Group JOURNALISTS: 212-553-0376 SUBSCRIBERS: 212-553-1653 Releasing Office: Moody's Investors Service Ltd. One Canada SquareCanary WharfLondon E14 5FA United Kingdom JOURNALISTS: 44 20 7772 5456 SUBSCRIBERS: 44 20 7772 5454 (C) 2012 Moody's Investors Service, Inc. and/or its licensors and affiliates (collectively, "MOODY'S"). All rights reserved.
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