International rating agency Fitch Ratings has changed the outlook on Turkey's sovereign rating of ‘B-‘ to positive from negative. The rating action reflects recent positive developments that auger well for an improvement in sovereign creditworthiness, notably the completion of the fifth review and deferral of net $6.8 billion of repayments in 2004 and 2005 under the current International Monetary Fund (IMF) program.
Central to underpinning a material improvement in Turkey's credit fundamentals is continuing fiscal consolidation necessary to place public finances on a sustainable path. Progress in meeting this year's public sector primary surplus target of 6.5 percent of Gross National Product (GNP) would support further positive rating actions by Fitch.
Under the new payment schedule announced on August 1, 2003, Turkey will repay the IMF $5.2 billion in 2004 and $7.8 billion in 2005, compared to the previous schedule of $9.7 billion and $10.1 billion, respectively.
By agreeing to defer repayments, the IMF has eased concerns over Turkey's financing outlook over the next two years. Moreover, the completion of the fifth review of the country's current IMF program has enhanced the prospects for the release of $8.5 billion financial support from the US government. However, the Turkish authorities may have to satisfy other conditions to unlock lending from the US.
The economy has grown more strongly and inflation fallen more rapidly than Fitch had expected at the beginning of the year. Nonetheless, the economic and financial situation remains fragile and vulnerable to adverse shocks.
Though the appreciation of the Turkish lira has helped moderate the public debt burden and supported disinflation, it has also raised concerns over the outlook for the current account of the balance of payments, which is expected to post a deficit equivalent to three percent of Gross Domestic Product (GDP) this year compared to one percent in 2002.
The most important risk to Turkey's financial stability remains its public finances. The delay in completing the fifth review reflected the need for the IMF and the authorities to agree on additional measures to maintain the credibility of the primary surplus target of 6.5 percent of GNP, given slippage in fiscal performance in the first half of the year.
Successful implementation of the measures agreed with the IMF to strengthen fiscal performance and continued structural reform are vital to a sustained and material improvement in sovereign creditworthiness. — (menareport.com)
© 2003 Mena Report (www.menareport.com)
