Given the political noise and recent softness in asset markets, is Turkey still a comfortably investment-grade sovereign?
Last week, the Turkish government, led by prime minister Recep Tayyip Erdogan, received a rude awakening when Moody’s put 10 of its country’s banks on notice for downgrade, including Garanti and state lender Turkiye Halk Bankasi, citing, in part, potential for asset-quality deterioration.
The fear is the move is a precursor to downgrade the sovereign, which is rated Baa3, the lowest investment-grade rating, with a stable outlook. Moody’s is due to make a decision on the country’s outlook on April 11. Standard & Poor’s bestows Turkey a low investment-grade status at BB+ with a negative outlook, while Fitch gives it a BBB- rating with a stable outlook.
Given Turkey’s vulnerability to Fed tapering – including the traditionally large stock of foreign ownership of domestic debt, portfolio-financing of its structural current-account deficit and its high-beta currency – the recent corruption allegations and local elections on Sunday have undermined foreign-investor sentiment.
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| Prime minister Recep Tayyip Erdogan |
Nevertheless, in recent weeks, EEMEA fixed-income analysts have recommended long Turkey over Russia, given sanctions-threat on the latter. However, Bank of America Merrill Lynch reversed this recommendation this week, citing attractive valuations in Russia. As Euromoney has reported, analysts reckon Turkey could fall into a technical recession this year amid higher interest rates to correct imbalances.
While Turkey’s asset markets are traditionally de-linked from lagging credit ratings, the government aggressively championed its coveted investment-grade status from Fitch in November 2012, followed by Moody’s this time last year. (Traditionally, bond mandates benchmarked to ratings require at least two rating agencies to bestow an issuer investment-grade status before permitting allocations.)
A ratings downgrade, or threats thereof, would be seen as a big blow to the government, therefore. But, according to data from Euromoney Country Risk (ECR), which has more than 400 economists around the world contributing opinions on sovereign risk on a regular basis, this would prove premature.
ECR states that Turkey, with a score of 55.17, remains comfortably ranked in tier three (ranging from 50 to 64.9) of ECR’s five-tier system. This is equivalent to a BB+ to A- rating, under the survey’s methodology, suggesting economists believe the country presents only moderate risk to foreign trade and investment.
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What’s more, Turkey’s banking stability indicator, on a score of 6.6 points (out of 10), is the country’s strongest sub-factor score, underscoring analysts’ confidence in the sector, despite Moody’s downgrade threats.
A ratings downgrade would come at an unusual time, given the shift to a more orthodox monetary stance and evidence of domestic rebalancing, while it’s not clear the political noise is substantially undermining economic policy in the near-term.
Nevertheless, the weakening of institutions and the government’s apparent lack of appetite to root out corruption suggests the country could be embracing an Adriatic, rather than northern European, model of development, characterized by a strong executive but weaker rule of law, negative for the sovereign’s creditworthiness in the long-term, says Timothy Ash, head of non-Africa emerging markets research at Standard Bank.
In any case, the following chart highlights Turkey’s upward ratings trajectory relative to the EU average over the years:
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