December 3 (SeeNews) - Turkey's Baa3 government bond rating is primarily underpinned by the country's diverse and dynamic economy and the government's robust balance sheet and track record of prudent fiscal policy, Moody's Investors Service said in a report.
The rating agency's report is an annual update to the markets and does not constitute a rating action.
The rapid growth in Turkey's economy over the last decade has been driven by a number of factors, including generally favourable domestic and external economic conditions and reform of the financial sector and political institutions, Moody's noted. The Turkish government's recent policy reforms designed to structurally reduce external vulnerabilities have helped the country improve its shock-absorption capacity and were key drivers of our decision to upgrade Turkey's sovereign rating to Baa3 in May 2013, it added.
The muted impact that the short-lived recession in 2009, and the associated reversal in capital flows, had on the Turkish government's balance sheet is a key indicator of the sovereign's strengthened shock-absorption capacity, according to Moody's. Since then, the government's balance sheet has continued to strengthen, with debt-to-GDP falling by 10 percentage points since 2009 and the composition of debt becoming more resilient through lengthened maturities and a reduced share of foreign-currency-denominated liabilities.
Nevertheless, Moody's said that Turkey's rating remains constrained by the high level of external vulnerabilities present in the economy, with a current account deficit and an external vulnerability indicator, which measures short-term foreign debt obligations in the economy as a proportion of foreign-exchange reserves, among the highest in the investment-grade sovereign rating universe.
Despite having narrowed recently, the current account deficit - projected at 7.5% in 2013 - and the associated external financing needs - projected at around 25% of GDP in 2013 - are expected to remain elevated over the medium term, Moody's said. Turkey is also susceptible to an escalation of political risk, both domestic and geopolitical, it noted.
The major challenge for the authorities will be to continue reducing external vulnerabilities while ensuring healthy and sustained economic growth, according to Moody's. "Upward movement in Turkey's sovereign rating will continue to be constrained by balance-of-payments factors as long as external imbalances remain substantial. Upward rating pressure could materialise in the event of structural reductions in these vulnerabilities or further improvements in Turkey's institutional environment or competitiveness," it said.
Moody's added that it would consider downgrading Turkey's sovereign rating if improvements in public finances were to be materially reversed. A sudden and sustained halt in foreign capital flows would also exert downward pressure on the rating.