Erdogan is wrong: Turkey’s creditworthiness is waning

Euromoney’s survey experts continue to downgrade the borrower, disagreeing with the president’s claims there is no justification for it.

  • By Jeremy Weltman
  • 13 Mar 2017
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Turkey 2017 1

Flight of fancy: Erdogan flies in the face of credit rating agencies, which respond justifiably to shouts of mayday

Turkey’s risk score declined by 2.2 points in 2016, and is expected to be downgraded again this quarter in advance of a planned referendum on constitutional reform to be held in April, which is heightening the political risk premium attached to Turkish asset classes.

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Turkey fell three places last year in Euromoney’s global risk rankings, to 62nd out of 186 countries, extending a longer-term score decline connected to its security problems, the failed coup, and moves toward greater authoritarian control undermining its attributes as an emerging market (EM).

Last year, all bar one of Turkey’s political risk indicators were downgraded, notably those covering institutional risk and government stability.

All five economic risk indicators slipped, and all four structural indicators in the wake of the coup aftermath, which caused turmoil, delayed policymaking and led to currency instability, with the lira plunging.

To cap it all, Turkey’s credit ratings were downgraded, and the country commanded a lower capital access score.

Justified ratings action

The economic recovery is continuing, even if it lacks a broad basis at present, according to the latest research from BBVA, which takes part in Euromoney’s survey.

That said, the latest forecasts from the European Commission show GDP growth only picking up from 2.2% last year to 2.8% in 2017, an unemployment rate rising above 11%, inflation accelerating, a current-account deficit still exceeding 4% of GDP, and the fiscal deficit doubling to 2% of GDP.

Adding in the political risks, Turkey is languishing towards the bottom of the third of five risk categories in which Euromoney divides all 186 sovereign borrowers it surveys:

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The country is moreover poised to drop below Brazil based on early scoring from contributors to the first quarterly survey of 2017, the results of which will be confirmed in a few weeks’ time.

This justifies the rating agencies’ concerns, and makes an investment grade out of the question at present.

Rising political risk

Turkey lost its final BBB- rating – from Standard & Poor’s – in January, just as its declining Euromoney risk score predicted it would.

Recep Tayyip Erdogan says the constitutional reforms should have no impact on investor risk, but independent credit risk experts disagree.

The proposed 18 constitutional amendments, should they be approved, entail a major change from a parliamentary-based political system to one imbuing executive presidential control, thus handing Erdogan sweeping powers over the budget, to select judges and rule by decree, weakening the democratic checks and balances that form an important aspect of a country’s risk profile.

This comes amid a huge crackdown on opponents, including followers of the exiled Islamic preacher Fethullah Gülen and businesses associated with him, whom Erdogan blames for perpetrating the coup and plotting terrorist attacks also carried out by the oppressed Kurdish minority, which heighten operating risk.

Bank sector and debt considerations

The latest country risk bulletin from the Byblos Bank Group, a contributor to Euromoney’s survey, cites recent S&P research noting the risks to the banking sector stemming from the domestic tensions following the failed coup and the planned constitutional referendum.

These are compounding the risks from lira depreciation undermining repayment ability and offsetting a generally sound sector, illustrated by adequate asset quality, sufficient earnings and good capitalization.

Turkey’s bank stability indicator has fallen to 6.1 out of 10, below the scores awarded to South Africa and South Korea, and is only marginally ahead of Brazil’s (individual Turkish bank risk scores are also available).

Added to that are the rising external liability risks connected to the lira devaluation.

One contributor, speaking on condition of anonymity, says: “There is more than $200 billion of foreign-financed debt. The government is concerned about this, especially with anticipated Fed hikes weakening capital inflows.

“The government has set up a ‘wealth fund’ to hide its additional borrowing commitments without worsening the official debt ratio. It is bad timing and legally flawed.”

Turkey’s unenviable reputation as the highest-risk large EM is about to be sealed. The conclusion is simple – investors should continue to look elsewhere.

This article was originally published by ECR. To find out more, register for a free trial at Euromoney Country Risk.  

  • By Jeremy Weltman
  • 13 Mar 2017

All International Bonds

Rank Lead Manager Amount $m No of issues Share %
  • Last updated
  • 13 Mar 2017
1 JPMorgan 94,925.33 384 8.39%
2 Citi 87,531.58 331 7.74%
3 Bank of America Merrill Lynch 84,341.49 288 7.46%
4 Barclays 75,288.19 241 6.66%
5 Goldman Sachs 68,504.71 208 6.06%

Bookrunners of All Syndicated Loans EMEA

Rank Lead Manager Amount $m No of issues Share %
  • Last updated
  • 14 Mar 2017
1 Bank of America Merrill Lynch 10,650.87 23 11.13%
2 Deutsche Bank 8,169.49 17 8.53%
3 HSBC 6,243.46 23 6.52%
4 Citi 4,355.35 13 4.55%
5 SG Corporate & Investment Banking 4,273.37 17 4.46%

Bookrunners of all EMEA ECM Issuance

Rank Lead Manager Amount $m No of issues Share %
  • Last updated
  • 21 Mar 2017
1 JPMorgan 5,440.56 17 10.74%
2 Deutsche Bank 4,468.97 23 8.82%
3 UBS 3,742.72 17 7.39%
4 Citi 3,393.89 23 6.70%
5 Goldman Sachs 3,360.93 18 6.63%