Standard & Poor’s sees direct impact on Turkey’s credit ratings as unlikely

Standard & Poor’s Ratings Services said yesterday that the escalation of political tensions over the past week is unlikely to have any immediate impact on the sovereign credit ratings on the Republic of Turkey (foreign currency BB-/Stable/B; local currency BB/Stable/B). «Turkey’s creditworthiness is underpinned primarily by the improvements in economic management witnessed over the past six years,» said Standard & Poor’s credit analyst Farouk Soussa. «Consequently, the ratings are unlikely to be affected by near-term financial market volatility alone. The current political crisis may have longer-term implications for Turkey’s creditworthiness, however, in the event that it results in an interruption in, or reversal of, prudent economic policy.» Over the past week, political tensions in Turkey have been ratcheted up over the question of who will stand as a candidate for the country’s next president. In recent years, the presidency has been seen as providing a secular counterbalance to the Islamist tendencies of the Justice and Development Party (AKP) parliamentary majority. On April 24, Prime Minister Recep Tayyip Erdogan put an end to speculation that he would run for the presidency himself by announcing the nomination of Foreign Minister Abdullah Gul, a well-respected and popular politician both within Turkey and internationally. Nevertheless, expectations that this would diffuse a looming crisis were soon thwarted when opposition parties pulled out of the parliamentary voting process, challenging the legality of the vote in the constitutional court on the basis of what constitutes a parliamentary quorum. Retrograde step In a widely criticized and retrograde step for Turkish democracy, the military also issued a strongly worded statement expressing concern over the alleged desecularization of politics and reminding the government of its readiness to uphold the republic’s founding secularist principles. Street demonstrations by pro-secular groups have added to the tensions in what has become a standoff between the government and the military. Uncertainty regarding how this standoff will be resolved is causing anxiety among the investment community, although the Constitutional Court decision (E.N.: issued yesterday) may help to provide some clarity. Turkish financial markets are vulnerable to swings in investor confidence arising from political volatility, and the Istanbul Stock Exchange and the new Turkish lira have both been adversely affected in recent days. In the past, Standard and Poor’s has commented particularly on Turkey’s external vulnerability, arguing that while the long-term fundamentals remain sound, near-term volatility in the exchange rate is to be expected due to the preponderance of leveraged transactions (such as the carry trade) that seek to take advantage of the high real interest rates on offer in Turkey. (For further details, please see «Between A Rock and A Hard Place: Turkey’s Deficit Offers Limited Room For Maneuver,» published on February 27, 2007, on RatingsDirect, the real-time Web-based source for Standard & Poor’s credit ratings, research, and risk analysis.) Turkey’s fundamental creditworthiness, however, is largely unaffected by near-term volatility in financial markets. Strong fiscal consolidation over the past six years, vastly improved monetary policy and stability, wide-ranging reform in the banking sector and a surge in investment, productivity and economic growth, are all factors that have helped underpin the robustness of the Turkish economy. This was demonstrated in May and June of 2006, when a 25 percent depreciation in the currency over the space of a few weeks had limited impact on the real economy, save through a rise in inflation expectations and a subsequent hike in interest rates by the central bank.