The London-based Fitch Ratings agency has affirmed its sovereign ratings for the Republic of Turkey. Both the foreign currency and local currency ratings remain at 'B', while the short-term rating is also confirmed at 'B'. The outlook on the sovereign ratings is stable.
Rising political tensions and the possibility of early elections are threatening to undo much of the stabilization that has occurred since the start of the year. Although institutional changes mean that the direct fiscal implications of early elections would be limited, a prolonged period of policy limbo and uncertainty at such an important juncture could cause considerable damage.
Yields on domestic debt instruments have risen sharply in recent weeks and a sustained increase in interest rates, together with greater volatility of the lira, feed through quickly into additional debt-servicing costs given the structure of the domestic debt stock.
Meanwhile, at real interest rates of some 30 percent, it would not be long before fresh doubts arose over the sustainability of the public sector debt. The latest bout of market volatility reflects heightened political uncertainty and comes despite considerable achievements by the authorities in terms of economic reform and macroeconomic stabilization.
Restructuring of the banking system has progressed well, while other structural reforms have been handled competently, with a raft of new laws passed and a series of other concrete measures taking place.
Despite the political uncertainty, the government should still be able to access the local debt markets for the time being, albeit at considerable cost. Together with a large primary budget surplus and continued disbursements by the International Monetary Fund (IMF) and World Bank, Turkey should be able to meet its 2002 Treasury financing needs.
However, in the event that the government lost access to domestic financing, the Treasury would quickly face severe financing difficulties given the continuing large stock of short-term debt that must be rolled over. The chances of being shut out of the markets remain fairly low at this stage, but the risks will rise the longer the current political uncertainty remains unresolved.
A resolution of the current political uncertainty is critical. The three members of the coalition have stressed that they will try to avoid early elections, but given changing political dynamics this cannot be taken for granted. A satisfactory resolution whereby a caretaker administration or prime minister sees the country through to the 2004 elections could help stabilize the government's financial situation.
Early elections, provided they are handled competently and produce a new government that will continue to implement economic reform, need not spell disaster. On the other hand, a drawn-out period of political uncertainty that culminated in a new government that was unwilling to implement meaningful economic reform could drastically worsen the financing situation for the Treasury. Under such circumstances, Turkey's creditworthiness would deteriorate rapidly and its sovereign ratings would be downgraded.
Higher than expected interest costs and a failure to extend the maturity of domestic issuance would also complicate the outlook for 2003, swelling the budget deficit and increasing the total financing need. In short, if market confidence fails to recover, the financing outlook for next year will become more difficult than currently envisaged in official plans.
As well as large domestic rollover needs, Turkey faces large external financing needs this year and next, of some $27 billion and $23 billion respectively. IMF funding should ensure these needs are met for 2002, but in the absence of new IMF money and an improvement in market confidence, Turkey will struggle to fund itself in 2003. — (menareport.com)
© 2002 Mena Report (www.menareport.com)
