S&P Global Ratings revises Republic of Turkey’s sovereign credit outlook to negative

S&P Global Ratings has revised the sovereign credit outlook of the Republic of Turkey to negative, while re-affirming the country’s credit ratings. The monetary policy response to currency and inflationary pressures of Turkey's central bank may prove insufficient to anchor its inflation-targeting regime.

Given the large-scale dollarization of Turkey's economy, a weaker exchange rate erodes corporate balance sheets, financial sector asset quality, and growth. As a consequence, balance-of-payments and fiscal risks are rising faster in Turkey than in less-dollarized emerging market peers where we consider inflation adjusted benchmark policy rates to be substantially greater than zero.

"We are therefore revising our outlook on Turkey to negative from stable and at the same time affirming all of our ratings on Turkey," the report commented.

The negative outlook reflects risks to Turkey's economy from policy constraints, rising inflation, and exchange rate and balance-of-payments pressures. There are related signs of economic weakness, which may also reflect political uncertainties ahead of April's constitutional referendum, as well as parliament's recent decision to extend the government's state-of-emergency powers by another 90 days.

Turkey's tax base is skewed toward indirect rather than direct taxes, and the former are highly sensitive to import demand. For this reason, fragile private demand during 2017-2018, alongside a weaker lira, will lower imports this year, possibly dragging down fiscal performance, and increase spending, the report added.

Turkey's external position remains the key weakness for the ratings owing to its substantial net external liability position and related high external financing needs. In addition, further increases in the prices of oil and other energy products could accentuate any slowdown, given Turkey's large net energy import bill.