Turkey risking a sovereign downgrade to non-investment
Weak growth, high inflation and elevated external financing risk
We affirm our conviction that the downgrade of Turkey to the non-investment grade is highly likely by year-end as the high country risk premium would intensify the external financing risk of the country.
Key points
Turkey had its fifth coup in the 93-year history of the Republic of Turkey on 15 July. The elected government quickly took control and imposed a 3-month state of emergency period.
Risks to political and financial stability have increased, evident in the sell-off of Turkish assets.
External financing tops the list of risks the country faces, confronted with significant FX denominated debt redemptions of US$170bn over the next 12 months.
Failure to rollover maturing debt would challenge the financing of the current account balance.
Rekindling the refugee crisis is also a non-negligible event, as the EU/Turkey deal over refugees may be revoked on concerns over human rights violations.
We revised downwards our GDP growth and upwards our inflation forecasts in 2016 to 2.6% (from 3.1%) and 10% (from 8.1%), respectively.
We affirm our conviction that the downgrade to the non-investment grade is highly likely by year-end as the high country risk premium would intensify the external financing risk of the country.
Moody’s and Fitch have already scheduled Turkey’s sovereign rating review for 5 and 19 August, respectively.