Page 60 - TURKRptJul19

credit strengths, particularly its large, diversified economy and still-moderate levels of government indebtedness,” the rating agency said. The short-term foreign currency bond ceiling and short-term foreign currency deposit ceiling remained at Not Prime (NP/Extremely Speculative). Ceilings generally act as the maximum ratings that can be assigned to a domestic issuer in Turkey, including for structured finance securities backed by Turkish receivables. The decision to align the foreign currency bond ceiling and the government bond ratings reflected Moody's view that exposure to a single, common threat—loss of external confidence and capital—meant that the fortunes of public and private sector entities in Turkey were, from a credit perspective, increasingly intertwined. “The impact of the continued erosion in institutional strength and policy effectiveness on investor confidence is increasingly outweighing Turkey's traditional credit strengths including its large, diverse economy and the low level of government debt,” Moody’s reiterated. Turkey is structurally highly reliant on external capital flows, and Moody's confidence in its ability to continue to attract the large sums needed each year to repay debt and sustain growth is waning. Turkey remains highly vulnerable to a further prolonged period of acute economic and financial volatility, according to the rating agency. Foreign exchange reserve buffers are weak and Moody's expected them to weaken further over the next two years relative to economy-wide short-term liabilities. “While policy announcements have been made, the political authorities have yet to implement a plan that would allow the economy to adjust to a new, more sustainable equilibrium due to the negative short-term economic impact that this adjustment would entail,” the rating agency also said. The government's willingness or ability to implement policies that will sustain external investor confidence in the economy and financial system by addressing underlying weaknesses remained uncertain, according to Moody’s.
“Since mid-2018, the government has announced a number of economic reform packages. Ultimately, these announcements have been either reactive to particular pressures on the economy or a restatement of measures that would be credit positive if implemented, but have been discussed for years, and where little concrete has been done to execute on these policy aspirations. Most government measures, including those targeting the banking system, continue to be focused on the near-term priority of propping up economic activity at the expense of eroding the underlying resilience of the economy and its banking system to external shocks, in part by increasing its fragility to shifts in market sentiment,” it said. The longer that remains the case, the more the weakness implied by Turkey's very high reliance on external capital across all sectors of the economy comes to dominate Moody's analysis; and the greater the risk of further externally-sourced shocks involving further capital outflows, loss of reserves, a weakening in the exchange rate, rises in inflation and severe damage to medium-term growth. As a result, Moody's said it believed that the country's vulnerability to an acute and highly disruptive balance of payment crisis that ultimately would significantly constrain the capacity and perhaps the willingness of the government to service its debt was now more aligned to a single B rating, despite its still moderate debt burden relative to similarly-rated peers.
“Intermittent currency crises”. “Turkey is indeed once again facing intermittent currency crises after a period of relative calm that lasted from late September 2018 through February 2019,” Moody’s said. “In consequence, both gross and net reserves have fallen since February, with the decline in net reserves being particularly pronounced. Gross and net reserve levels have been structurally weak for many years, but this decline contributes to a significant increase in external vulnerability for the country.” For 2019, Moody's expected that short-term external debt repayments, currently maturing long-term external debt, and total non-resident deposits would total more than 2.6 times the level of FX reserves. “Moreover, funding costs have risen rapidly, with yields up by around 400 basis points since February,” Moody's said.
Fall in FX Reserves. “The fall in FX reserves seems contrary to the central bank's longstanding policy to allow the exchange rate to float freely, and raises
60 TURKEY Country Report July 2019 www.intellinews.com