Fitch Ratings today says the start of Turkey's EU accession negotiations is supportive of Turkey's sovereign rating prospects by underpinning political stability and encouraging further policy discipline.
"The start of accession negotiations, together with the ongoing IMF programme, provides a strong framework for the continuation of economic reforms, including privatisation and fiscal discipline," says Nick Eisinger, Fitch's lead analyst on Turkey. Accession negotiations will be both protracted and controversial, and it will probably be many years before Turkey is in a position to join the EU, subject to vetoes and referenda in many EU countries. Fitch is not overly concerned with these difficulties, however, as it believes that the process of accession is equally (or more) important than membership itself, especially given how exacting the conditions of many of the EU chapters are expected to be. The process of accession will underpin further structural transformation of the Turkish economy, encouraging foreign investment inflows on the back of accelerated liberalisation and privatisation.
In the short run, the start of accession negotiations should support market confidence, providing ample financing for the large current account deficit and underpinning the exchange rate. This will be supportive of Turkey's disinflation programme and should allow the central bank to resume cutting interest rates. This should in turn support public finances as the cost of public debt servicing is reduced. Disinflation should also support improvements in debt management as the authorities are able to issue longer-dated domestic debt, thus raising the average maturity of domestic government debt and reducing the large public financing burden.
Fitch forecasts the general government deficit to fall to 4.3% of GDP in 2005 and general government debt to fall to just below 70% of GDP, perhaps more so if some of the many privatisation projects in the pipeline are finalised in the coming weeks. Public debt dynamics remain vulnerable to interest rate and exchange rate shocks, but this vulnerability is lower than two years ago and should continue to fall in 2005-2006. It would take a sizeable economic shock to rekindle the explosive rise in public debt dynamics that occurred during 2000-2002.
A by-product of Turkey's recent success has been a widening of the current account deficit, which Fitch estimates at 5.7% of GDP in 2005 and at least 5% of GDP in 2006, driven in part by high global oil prices. Turkey is generating balance of payments surplus, allowing the central bank to build reserves, but the quality of external financing has been relatively weak, characterised by sizeable short-term and partly speculative flows. The large and relatively unfavourable external financing mix leaves the balance of payments exposed to shocks and possible tightening in global interest rates. The start of accession negotiations is helping to reduce this vulnerability by encouraging strong foreign direct investment inflows, in part related to the privatisation programme. Short-term capital inflows will continue to provide an important share of external financing, but these look less vulnerable following the accession decision.