Capital Intelligence, the international emerging markets rating agency, has raised Turkey's short-term foreign currency rating to B from C and revised the long-term outlook to stable from negative. The long-term foreign currency rating remains at B.
The rating change reflects improved prospects for government financing in the short term as well as the government's efforts to implement economic reforms and determination to keep the primary budget surplus targets for 2003 and 2004 on track.
The recent decision of the International Monetary Fund (IMF) to allow Turkey to shift $4.5 billion of debt repayments due to the Fund in 2004 to later years has eased Turkey's debt service burden for next year, bolstered market confidence, and reduced one potential source of balance of payments pressure. The government's ability to safely service its debts in the short term is also expected to be supported by financial assistance from the US in the form of either a one billion dollar grant or loans of up to $8.5 billion.
Despite bouts of political and economic turbulence over the past 12 months, the Treasury has not had any serious difficulties meeting its short-term financing needs. Financing prospects have improved with growing market confidence, which is crucial given the structure of the government debt stock and the need to roll over large redemptions of debt. Demand by non-bank residents for lira-denominated assets has increased, the exchange rate has strengthened, and bond yields have fallen; these factors have helped to ease the debt situation this year.
The macroeconomic backdrop has also brightened. Economic activity is brisk, exports are growing rapidly, inflation is falling and the central bank will likely come close to meeting its year-end inflation target of 20 percent. While the current account deficit has widened somewhat, external financing is manageable in 2003, and is expected to remain so in 2004 with official foreign exchange reserves continuing to cover over 75 percent of the public and private sector external financing requirement. Economic reform is also progressing reasonably well with the government more-or-less adhering to its IMF-supported structural reform program.
CI notes that further fiscal adjustment is essential for sustaining market confidence and avoiding an increase in Treasury funding needs over the next year. It is also the key to alleviating Turkey's worrisome debt dynamics and to future ratings upgrades. It is therefore important that the government delivers on its recent pledge to cut certain expenditures in order to meet its primary budget surplus target of 6.5 percent of gross national product (GNP) in 2003, and sticks to the same target in 2004. — (menareport.com)
© 2003 Mena Report (www.menareport.com)
