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bne October 2020 Companies & Markets I 19
Some of those measures are being withdrawn now, but credit growth will remain high through the end of the year.
The budget
Earlier this summer, Moody's reduced Turkey's fiscal strength factor score by two notches to "ba1" as debt affordability weakened markedly due to rising government debt levels, while there is a weaker debt structure that renders the government's finances more vulnerable to high inflation and currency depreciation than was the case only a few years ago.
The fact that Turkey has had to contend with two crises since 2018 has taken a toll on the public finances even though
the government's fiscal response to the pandemic has been relatively modest.
The weak growth performance and fiscal measures to manage the economic effects of the coronavirus will have a meaningful impact on the deficit in 2020, and Moody's forecasts that it will rise to 7.5% of GDP (using the IMF definition, which excludes one-off revenue sources).
In addition to the widening primary balance, the depreciation of the lira and high inflation will contribute to an increase in the debt burden and higher interest payments on account of an increased reliance on domestic and floating-rate borrowing which comes at the expense of higher yields.
As a result, Moody's forecasts the government debt burden to increase from 32.5% in 2019 to 42.9% in 2020 and the debt affordability ratio (the ratio of general government interest payments to general government revenues) will deteriorate to 8.8% in 2020, up from 7.3% in 2019 and 5.8% in 2018.
Under Moody’s baseline scenario, the return to growth after the economic shock of 2020 will not suffice to offset the impact on the upward debt trajectory of primary deficits of around 2% and an increasing interest burden. Therefore, Moody's expects Turkey's debt burden to increase to above 46% of GDP in the coming years.
While Turkey's debt metrics are still more favourable – sometimes by a significant margin – than those of similarly rated peers, in Moody's view the deterioration in debt metrics outlined above means that Turkey's fiscal strength no longer offsets the country's other credit challenges to the same degree that it has in the past.
This situation could be exacerbated if, for example, the government's desire to revive growth were to lead to even larger budget deficits than expected and if it needed to cover obligations on public-private partnerships (PPPs) or guaranteed debts.
E(nvironmental) S(ocial) G(overnance)
Turkey experiences some environmental pressures because of rapid population growth, which has translated into industrialisation and rapid urbanisation. While this results
in increased pollution and some degree of environmental degradation, these considerations are not material to Turkey's credit profile.
Turkey is faced with labour market rigidities and low female participation rate in the labour market. Moody's regards the coronavirus outbreak as a social risk.
Moody’s assessment of Turkey's weak and deteriorating governance has been an important credit feature, which has underpinned its decision-making in downgrading Turkey's rating by multiple notches since the introduction of the executive presidential system in mid-2018.
Since then it has become frequent practice in Turkey that official decrees, which order sometimes significant changes in laws and practice, no longer need go through parliament
to gain approval. These interventions by decree have become more frequent since the 2018 market pressures. Moreover, the executive continues to undermine the independence of key institutions, meaningfully undermining those institutions' credibility and effectiveness.
Default history: At least one default event (on bonds and/or loans) has been recorded since 1983.
Given the negative outlook, a positive outlook or an upgrade is highly unlikely. However, the rating outlook could stabilise if fiscal and monetary policies become more coherent in preventing further exposure to a balance of payment crisis near term. External financial support could also be credit supportive, as would diminished tensions with the US and the EU. A determined set of economic reforms that address the economy's structural imbalances while capitalising on the country's inherent strengths could lead to upward rating pressure over the medium term.
Turkey's rating would likely be downgraded if there was an increasing likelihood that the current balance of payments pressures were going to deteriorate into a full-blown crisis. In such an event, the government could try to conserve scarce FX assets by imposing restrictions on foreign-currency outflows that affect sovereign creditors as well.
Chart by @e507.
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