Turkey Rating Review

Turkey Rating Review My piece from yesterday attempting a comparison of Turkish versus Latvian credit fundamentals appears to have hit something of a chord, and has been picked up extensively by the Turkish press, and presumably by its Latvian counterparts (“you cant win them all”).

Rating agencies, analysts (including myself) and indeed investors can get stuck in something of a blinkered world sometime where we spend most of our time analysing particular sub-sets of countries but fail to see the big picture and look for better cross-region/country comparables.

The Turkey-Latvia comparison surely does suggest that the formers sub-investment grade (Ba3/BB-) ratings are extremely harsh. Numerous other rating anomalies with respect to Turkey can also be drawn. Why, for example, is Turkey rated on par with Gabon and Nigeria (true the latter now has a big oil wind-fall fund, and lowly public sector debt ratios, but I would argue that willingness to pay in a more stressed global/oil price environment might be significantly less than stress-tested Turkey). And, why on earth is Turkey rated two notches behind Egypt (Ba1/BB+); answers on a postcard please, but covering both credits for a decade or more I really, really struggle with this one. Egypts external financing position is, arguably stronger, albeit Turkeys has improved markedly over the past year (both countrys current account positions could be +/- 1% this year), but Turkeys banks are undeniably stronger, and public finances in my mind are stronger in Turkey, despite the recent emergence of a more counter-cyclical fiscal stance in Turkey. And while the rating agencies seem to attach a premium to EU membership in Latvias case (the only possible justification in my mind for Latvias current rating), they dont seem to give Turkey any credit herein for its EU Candidate Member State status, e.g. over Egypt.

On the subject of EU member states in crisis, Turkey is rated 3-5 notches behind Hungary, which has much worse external/public financing ratios and was forced to go to the IMF for emergency funding last year; at least Turkey is currently trying to get by without an IMF programme. Similarly it is also rated 2-3 notches behind Romania which was also forced to go to the IMF for funding earlier this year. A number (at least 3 on our reckoning) of other EU member states could also join the queue for IMF funding;

Standing back and taking an even bigger perspective, Turkey is rated 3 notches behind Brazil/Colombia (probably should be rated below these, but 3 notches?), is rated a notch or two behind the likes of El Salvador, Guatemala and Costa Rica. And get this one rating agency even has Turkey rated on par with Venezuela. While Latam is clearly not my “turf” I know enough about the latter credit to think that this is surely doing something of a dis-service to Turkey.

I think as analysts we have all been on something of a learning curve through the current crisis. Stress tests have often thrown up results which have not been backed by the actual eventual evolution of events on the ground. The obvious one here is a Russia-Turkey comparison. I dont think any credit risk model would have indicated how badly Russia would have been impacted; and remember the Russia sell-off began pre-Lehman. Yet the same models typically put Turkey at the top of the “at risk” category because of its large external financing requirement (~ US$110bn). As it turned out Russias ex-ante large current account surplus did not help it much, as oil prices corrected lower, and Russian corporate struggled to roll-over huge, publically held liabilities; Russias external debt amortisation is still running at ~ US$140bn annually this year . Turkey benefitted from lower oil prices and a rapidly narrowing current account deficit, while its external liabilities were typically narrowly held and much more easily “rolled” as a result. Turkeys banks have also massively outperformed their peers in Emerging Europe, partly thanks to the 2000/2001 crisis which encouraged a root and branch reform of the sector; NPLs in Turkey are likely to increase to 5-7% at most during the current downturn, whereas in Russia they are already at least 10%, and rising fast. True Russia still has some underlying sovereign credit strengths, e.g. a weight of FX reserves still (US$409bn), modest public sector debt ratios and cash in the fiscal reserve, and probably should be rated above Turkey, but 4-5 notches?

It is not unfair to say that Turkey has been extreme “stress-tested” and has come out of the other side in reasonably good shape relative to its peers. True the economy is set to contract by 4-5% this year, and the budget deficit is set to increase to perhaps 5-6% of GDP. But its growth performance is still on-par for the region (not as good as Poland, but much better than Russia/Baltics/Ukraine/Hungary), and its budget performance is still likely to be better than the EU average; the UK/US are likely to have deficits ~ 10% of GDP. Turkeys general government debt/GDP ratio (ESA-95) is sub-40%, versus a ~ 70% EU average.

Turkey probably needs credit for performing so well, against its peers, and indeed much better than many of its better-rated regional peers. Net-net at Ba3/BB- Turkey does now appear under-rated; albeit the vogue for rating agencies at present is towards downgrades so whether they will come up with the goods any time soon is debatable. Fortunately with Turkey 5Y CDS pricing around 250bps, inside six EU-member states, and 30bps inside of Russia, markets appear to be somewhat more efficient in pricing than rating agencies.

With that “mea culpa” out of the way, back to the business of the day. Herein the lira has been following regional currencies stronger over the past few days, on something of a post-Latvia relief rally, helped by the resumption of dollar weakness. It is interesting though that with the exception of the HUF, regional currencies have largely flat-lined against the euro, while rallying against the US$ on the cross. Rates are, however, coming down again now in Turkey, with ABN Amros TRY bond index indicated 5bps tighter this morning, around 12.80%, i.e. tighter by around 40bps on the weeks highs.

(+/-) We did not read too much into PM Erdogans comments y/day over the future course of Turkey-IMF relations. He noted that he hoped that discussions with the IMF would be concluded by the summer (so do we: please put us out of our agony death by IMF negotiations) but that Turkey would only conclude a deal on its terms, i.e. was not desperate to cut a deal with the Fund. Again, from the Turkish perspective, or perhaps more pertinently from PM Erdogans perspective, an IMF deal is Plan B, with the preferred option being Turkey managing through the crisis on her own resources to prove the naysayers wrong. Thus far, and judging by high roll-over ratios on domestic debt auctions, his strategy is working. The IMFs Lipsky is due in Turkey later this month, and will be in an unusual position of having to sell an IMF programme to a potential recipient

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