Turkey: Moody's remains on hold and upbeat

Turkey: Moody's remains on hold and upbeat

Moody's is holding its 6th Annual Turkey Credit Risk Conference in Istanbul today. In the morning session of the meeting, Turkey analyst Sarah Carlson made a presentation on "Sovereign risk in Europe: Turkey and the Euro Area." Recall that, Moody's maintained Turkey's sovereign rating unchanged at Ba1 and kept the positive outlook yesterday.

Carlson stated that the rating assessment was based on four factors: i) economic strength, ii) institutional strength, iii) government's financial strength and iv) susceptibility to event risk. Moody's sees Turkey's economic and institutional strength moderate, whereas the government financial strength is assessed as high. Nevertheless, susceptibility to event risk (read external imbalances) is also considered as high. Taken together, Moody's stated that these evaluations would imply a rating range of Baa2-Ba1. Turkey's current rating lies at the low end of this range.

Moody's acknowledged that Turkey's current account deficit was partly structural and current account deficit of some magnitude was to be expected on an ongoing basis. Carlson hinted that the agency would not necessarily wait for a significant reduction in the current account deficit to upgrade Turkey since part of the deficit was structural and structural reforms would take time to bear fruit. She noted that continuation of structural reforms, which would support import substitution, increase domestic savings and help to mitigate the current account deficit, could trigger an investment grade upgrade.

We continue to expect Turkey to receive an investment grade rating from Moody's in H1 2013 (please see "Turkey: Life after the upgrade" piece on Macro Matters released on 15 November). This year, the most of the European sovereign rating actions from Moody's took place in February, June and November. Overall, we believe Moody's analyst's assessment on Turkey was rather upbeat, as she has referred to Turkey's resilience to external shocks a number of times. In addition, if the CBRT builds up its FX reserves further, this would also provide a buffer against external shocks, which in turn can also trigger an upgrade. She also seemed to be fond of the variety of tools used by the CBRT, including ROCs. If the adjustment in the external imbalances continues or the authorities continue to take structural measures to address these imbalances, Turkey should receive an investment grade rating, in our view.