The formation of a competent and reformist government in the November general elections is crucial for a lasting improvement in Turkey's creditworthiness, asserts the latest report issued by Fitch Ratings on the possible political outcomes of the elections and what these might mean for the heavy domestic and external financing burden that the authorities will face in 2003.
Fitch currently rates the foreign currency and local currency debt of the republic of Turkey at 'B', while the short-term rating is set at 'B'. The outlook on the sovereign ratings is Stable.
Recent political developments have been encouraging, including the creation of a new, reformist party and the passing of European Union (EU)-related legislation. However, politics remain volatile and the chances of disappointment in November are still high.
Efforts at forging a center-left alliance are proving fruitless and the fragmentation of reformist parties suggests that it will be difficult to form a government that excludes the Islamist AK party. Political tensions could also arise from a military campaign on Iraq and a rebuttal by the EU regarding a roadmap to accession negotiations.
Failure to stabilize the political situation and secure the confidence of the local markets would force yields up again, shorten debt maturities and prompt new weakening of the the lira. The local market appears to be factoring in a positive outcome to the November elections, so a disappointing result could prompt severe turbulence.
Under these circumstances, the government would face severe liquidity and rollover problems early in 2003, not to mention increased doubts over the country's solvency, perhaps forcing a restructuring of domestic debt obligations. Domestic default would hit the banking system hard, prompting accelerated capital flight and undermining the capacity to service external debt as well.
Fitch's base-case scenario is still one where a reasonable political outcome is achieved after the elections, leading to improved confidence, lower interest rates and a more manageable debt-servicing burden. The Treasury still has a number of financing and debt-management options to ride out short-term volatility but, under a situation of permanent stress, these will not offer a proper solution to the debt problem.
In addition to large treasury financing needs in 2003, Turkey faces a sizeable external financing burden, estimated in the region of $25 billion. This may be difficult to meet, especially given the sharp drop in net International Monetary Fund (IMF)/World Bank (WB) inflows.
Plans to issue up to $4.5 billion in the bond markets are also contingent on an improvement in confidence. Turkey could, therefore, be facing an external financing gap in 2003 ranging from five to eight billion dollars. In the absence of a lasting improvement in market confidence, a new IFI funding package may be needed. — (menareport.com)
© 2002 Mena Report (www.menareport.com)
