S&P affirms Turkey's credit rating; outlook stable

ANKARA

S&P on Friday affirmed Turkey's long-term foreign currency rating at "B+" and long-term local currency rating at "BB-," with a stable outlook.

The stable outlook considers the risks from Turkey's economic imbalances, but these are partly offset by the resilience of Turkey's private sector and the manageable stock of net general government debt, the global rating agency said.

"Our ratings on Turkey remain supported by its diversified economy and resilient and adaptive private sector, which, in the past, has weathered external shocks, currency volatility, and frequent changes in economic policy," it said in a statement.

"Turkey's economy has recovered faster than those of other emerging markets, with real output already 8.4% above the pre-pandemic peak as of the second quarter of 2021," it added.

The agency said it expects Turkey's economy to expand by 8.6% this year with a strong recovery in exports and resilience of domestic activity to the pandemic.

It said Turkey's credit rating would be upgraded if balance of payments are strengthened, especially the central bank's net foreign-exchange reserves.

The rating would also be revised up if there is an effectiveness in monetary policy, it added.

"The Turkish economy rebounded briskly from a pandemic-related downturn last year, and has continued to expand in 2021," the statement said.

"In real terms, output had already exceeded the pre-pandemic peak in the third quarter of 2020, and now stands 8.4% above the pre-pandemic level attained in the first quarter of 2020," it added.

Noting that Turkey has fully vaccinated more than 55% of its population, with almost 65% having received at least one jab, S&P said pandemic risks for the Turkish economy are now receding.

"The lifting of pandemic-related restrictions, as well as the removal of Turkey from red travel lists by several EU countries, the UK, and Russia, has allowed tourism to restart, boosting service exports," it said.

The agency said Turkey's travel income from visitors abroad jumped to $7.7 billion in May-August period of this year, which is a significant increase from $2 billion during the same period of last year.

Turkey's total travel revenue amounted to $10.5 billion in the first eight months of 2021, the agency said, adding the amount could increase to $18 billion for the full year.

S&P, on the other hand, warned that supply chain disruptions and higher energy prices could drag on economic recovery, since Turkey is an energy importing country.

The agency warned that it could lower Turkey's rating if there is a heightened risk of banking system distress, and if banks' access to foreign funding deteriorated, or domestic residents dollarized their savings further.

"Weakened asset quality following the large-scale credit stimulus in 2020 could also put pressure on the banking system, particularly state-owned banks that saw their balance sheets expand more rapidly last year," it said.