Fitch Ratings, the international rating agency, has assigned a long-term foreign currency rating of 'B-' ('B Minus') to the republic of Turkey's 650-million-euro bond, issued June 10, 2003. The outlook on Turkey's sovereign ratings is negative.
Domestic and international events have developed in Turkey's favor over the past several weeks. The war in Iraq has proven short, relations with the US have improved and the government has been able to resurrect its current IMF program.
As a result, investor sentiment has improved sharply, facilitating the government's access to the capital markets. Interest rates have compressed and the lira has appreciated sharply, helping to quell doubts over the government's financing plans for 2003.
The delay in completing the current fifth review under the IMF program, necessary to release a further $500 million, underlines the economic policy challenges facing the authorities. Nonetheless, Fitch expects the review to be completed without much further delay, which would be a positive development and underpin Fitch's greater confidence in the government's financing program for the remainder of 2003.
However, Fitch stated it is concerned with many of the country's credit fundamentals, including the large budget deficit, high and volatile government debt stock and the rising current account deficit.
Fitch warned that the margin between failure and success will remain very slim for the foreseeable future. The volatile composition of much of the debt stock means that debt servicing capacity and debt sustainability issues remain hostage to market sentiment.
And even with the improved market sentiment of recent weeks, real interest rates on a large portion of the debt stock are hovering around 20 percent. This remains too high to alleviate concern over debt sustainability and Fitch believes local market yields are not expected to compress much further in the near term.
Debt servicing projections remain vulnerable to a sudden change in the exchange rate and interest rates. While Fitch sees no immediate threat to the stability of the lira, if market sentiment turns sour, the lira could fall back quite sharply given worries that it may have appreciated too far too fast in recent months.
The government continues to make progress with regard to some areas of the structural reform program. Privatization could enjoy some successes in the coming weeks, while some important laws have been passed. However, delays persist in other areas of structural reform.
Fiscal performance has been reasonable for the year so far, but this seems to be at least partly due to one-off measures. Fitch warns that fiscal pressures could emerge during the second half of 2003, and points to the formulation of the 2004 budget as a potentially problematic period for the government.
Meanwhile, the government is now facing a tough series of political reforms designed to enhance its bid to join the EU. There is potential for disappointment in this area. — (menareport.com)
© 2003 Mena Report (www.menareport.com)
