Moody's: Russia and Turkey face common growth challenges, despite differing exposure to commodity cycle

Credit ratings for Russia (Ba1, stable) and Turkey (Ba1, negative) broadly reflect a deterioration in previously supportive credit fundamentals, including their growth potential and, to a lesser extent, fiscal metrics, Moody's Investors Service said in a new peer comparison report.

The report, "Governments of Russia and Turkey Peer Comparison -- Turkey's Growth Potential and Russia's Fiscal and External Strengths Back Respective Credit Profiles", is available on www.moodys.com.

Moody's subscribers can access this report using the link at the end of this press release. The research is an update to the markets and does not constitute a rating action.

The report reviews the credit strengths and challenges that characterize the two countries, and gives Moody's forward-looking view of how the rating agency sees these drivers moving over the next 12 to 18 months.

"Turkey has greater economic growth potential, but Russia's economy is larger and wealthier," says Kristin Lindow, a Moody's Senior Vice President and co-author of the report. "We expect real GDP growth of around 3% in Turkey over the next four years, twice that of Russia's 1.5%, underpinned by Turkey's more favourable demographics. That said, downside risks proliferate with respect to Turkey's growth, while upside risks arguably dominate for Russia given that the worst of its recent crisis has passed."

With entrenched structural constraints -- low savings rates, declining total factor productivity and labour market inefficiencies in Turkey, and constrained household incomes, an ageing work force and over-dependence on hydrocarbons in Russia -- sluggish investment will likely suppress the potential growth of both countries in the absence of targeted structural reforms.

Turkey's demographics are more supportive of growth potential than Russia's, given that in 2016 57.9% of its population was under the age of 35, compared to 44.2% in Russia, according to United Nations figures.

Public debt in both Russia and Turkey is set to rise over the next two years, although the increases will be modest as a share of GDP. The starting point for Russia's debt is much lower (16% of GDP in 2016), thank Turkey's (28% of GDP). Debt servicing costs are also much lower in Russia.

While both countries usually run small budget deficits, maintaining these has become more difficult for Russia and Turkey as a result of country-specific challenges: lower oil prices in Russia's case and lower growth in Turkey's.