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Turkiye: The Long Road to 2023

Sovereign Overview

Erich Arispe Morales

Senior Director
13 December 2022
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Turkiye’s Sovereign Rating Evolution since 2016: Politics and Policies

Turkiye Rating History February 2022 – Downgrade to ‘B+’/Negative

 Policy-driven financial stress episodes; higher frequency & intensity.
Downgrade to ‘BB’: BOP &  Expansionary policies could entrench high inflation, increase public
BBB macro pressures, increased
finances’ exposure to exchange rate depreciation and inflation.
policy uncertainty and political
BBB- interference in monetary policy  High risk of additional destabilising monetary easing or stimulus
ahead of the 2023 elections. Uncertainty about policy reaction
BB+ function.
Downgrade to ‘BB+’:
BB Political and macro fallout
July 2022 – Downgrade to ‘B’/Negative
from 2016 coup attempt  Guided by political considerations, the central bank maintains a loose
BB-
policy stance despite rapidly rising inflation, the impact of the war in
B+ Ukraine and tightening global financing conditions.
Downgrade to ‘BB-’: Dismissal
of CBRT governor, increased  The government’s focus on maintaining high growth feeds FX
B demand, depreciation pressures, decline in international reserves
policy uncertainty
and spiralling inflation, and discourages capital inflows.
B-
 Selective macroprudential policies and tighter capital flow
May 14

May 19
Aug 15

Aug 20
Nov 11

Nov 16

Nov 21
Feb 13

Feb 18

management measures do not reduce risks to macroeconomic and

financial stability.
Source: Fitch Ratings

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Turkiye Sovereign Rating in Perspective

Turkiye – Rating Evolution Turkiye Rating Summary Rating Sovereign (QO Notch Diff)
Sovereign Rating Model (SRM) and Actual Rating
BB- Brazil (-3 notches)
SRM Predicted Actual Rating
A- LTFC IDR: ‘B’ Negative Outlook South Africa (-3 notches)
Sovereign Rating Model: ‘BB’ Dominican Rep (+1/-1 notches)
BBB+
Qualitative Overlay: -3
BBB B+ Egypt (0 notches)
Structural: -1 notch, to reflect vulnerabilities in the
BBB- banking sector (significant reliance on foreign financing Jamaica (0 notches)
and high financial dollarization), and the risk from
BB+ geopolitics and foreign relations, including sanctions, and B Turkiye (-3 notches)
BB as well as of domestic social unrest. Costa Rica (-6 notches)
Macro: -1 notch, to reflect that risks of potential
BB- additional macroeconomic and financial stability are not Bolivia (0 notches)
B+ fully captured by the SRM due to the current policy mix B- Nigeria (0 notches)
and potential reaction to shocks.
B External Finances: -1 notch, to reflect a very high gross Ecuador (0 notches)
B- external financing requirement, low international liquidity CCC+ Pakistan (0 notches)
ratio, a weak central bank net foreign asset position, and
2009

2011

2018

2020

2022
2010

2012
2013
2014
2015
2016
2017

2019

2021

risks of renewed balance of payments pressures in the CCC- Argentina (0 notches)

event of changes in investor sentiment.
Source: Fitch Ratings
Stable Outlook; Negative Outlook

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Track Record of Destabilizing Stimuli, Higher Frequency Financial Stress

Credit Stimulus Leads to Wider External Deficits Repeated Episodes of Policy Driven Stress
FX-adjusted credit growth (yoy) (LHS) 12m current acct. balance (RHS) TRY (LHS) 5y USD CDS (RHS)
(%) (USDbn) (TRY/USD) (bps)
70 -80 20 1000

60 18 Monetary and Monetary

-60 credit policy easing 800
50 16 stimulus
40 14 Dismissal of
-40 Governor 600
30 12 Agbal
-20 10 400
20

10 8
0 200
6
0
4 0
-10 20

May 21

Sep 21
May 20

Sep 20

May 22

Sep 22
Nov 20

Nov 22
Nov 21
Mar 20

Mar 22
Mar 21

Jan 22
Jan 20

Jan 21
Jul 20

Jul 22
Jul 21
May 18

May 20
May 12

May 14

Sep 15
May 16

Sep 17

May 22
Sep 11

Sep 13

Sep 19

Sep 21
Jan 11

Jan 13

Jan 21
Jan 15

Jan 17

Jan 19

Source: Fitch Ratings, CBRT & BRSA Source: Fitch Ratings, Bloombertg & Haver

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New Economic Model, Liraisation Strategy: Objectives vs Outcomes

Easing Dollarization, Higher FX Risk Continued Exchange Rate Pressures Spiralling Inflation
FC deposits and FX–protected Depreciation against the USD since end-2021 Expectations = median; B median = avg. inflation
FX protected deposits (LHS) CPI yoy 12-m expectation
(%)
Natural persons FC deposits (LHS) 24-m expectation B median
Commercial FC deposits (LHS) (%)
FC Deposits (RHS) COP 90
FC Dep + FX-protected (RHS)
(USDbn) (%)
280 80 TRY 75

240 70
60
200 60 EGP
50 45
160
40
120 ARS 30
30
80 20 15
40 10 Cedi
0 0 0

Sep 16

May 21
Dec 21
Aug 19
Nov 17
Jun 18
Sep 22

Mar 20
Sep 21

May 22

Apr 17
Aug 22

Oct 20
Jan 19
0 7 14 21 28 35 42
Nov 21

Jun 22

Feb 16
Oct 22
Oct 21

Jul 22
Jan 22

Apr 22
Feb 22

Source: Fitch Ratings, BRSA & CBRT Source: Fitch Ratings & National Authorities Source: Fitch Ratings, Turkstat & CBRT

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Weak External Liquidity Relative to Peers and Vulnerabilities

Partial Recovery in International Reserves Weak External Buffers

Gross international reserves Net international reserves Reserve coverage as months of current external payments
(USDbn) (Months) Int. reserves/CXP (LHS) Ext. liquidityª (RHS) (%)
125 10 240

100
8 180

75
5 120
50

3 60
25

0 0 0

Turkiye
Jamaica

median

median
Brazil

S. Africa

Egypt

Ecuador
May 22

Sep 22
Dec 21

Aug 22
Jun 22

Nov 22
Apr 22
Mar 22

Oct 22
Jan 22

Feb 22

Jul 22

(BB-)

(B+)
(BB-)
(B+)

BB

(B-)
(B)
B
a Liquid external assets as % ST. ext.
liabilities
Source: Fitch Ratings, CBRT & Haver Source: Fitch Ratings, National Authorities

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Global Slowdown, Higher Commodity Prices & Uncertain Financing

Trade Dynamics: Demand vs. Prices High Current Account Deficits Uncertain External Deficit Funding
12m rolling energy bal. (LHS) 5y Avg. 2021 Net FDI Net port. & other inv.
12m rolling gold bal. (LHS) 2022F Net E&O Use of reserves
12m travel Bal. (LHS) 2023F Current acct. deficit
Non-energy, gold imports (RHS) (% GDP ) (USDbn)
Non-energy, gold exports(RHS) 7.5 80
(USDbn) (% yoy)
90 120 6.0
60
70 100
4.5
50 80 40
30 60 3.0
10 40 20
1.5
-10 20
0.0 0
-30 0
-50 -20 -20
-1.5
-70 -40
-90 -60 -3.0 -40

B median

BB media

Turkiye (B)
Egypt (B+)

Ecuador (B-)

S. Africa (BB-)
Brazil (BB-)

Jamaica (B+)
Dec 21
Sep 20

May 22

Nigeria (B-)
Nov 19
Jun 19
Jan 19

Apr 20

Feb 21
Jul 21

2013

2017

2021
2010
2011
2012

2014
2015
2016

2018
2019
2020

9M22
Source: Fitch Ratings, IMF & Turrkstat Source: Fitch Ratings, National Authorities Source: Fitch Ratings, CBRT

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Public Finances Support Creditworthiness

Lower Fiscal Deficits, Financing Needs Lower Government Debt, High High Revenue Base
Foreign-Currency Share General government revenue, 2022F
Gen. govt. deficit Gen. govt. amortizations Gen. govt revenue (LHS)
General government currency composition
GG debt % of GG revenue (RHS)
(% GDP ) Foreign currency Local currency
(% GDP ) (%) (%)
35 90 40 600
30
75 32 480
25
20 60
24 360
15 45
10 16 240
30
5
15 8 120
0
-5 0 0 0
S Africa (BB-)

S Africa (BB-)
Ecuador (B-)

Ecuador (B-)
Egypt (B+)

Egypt (B+)
B median
Turkiye (B)

Turkiye (B)
B median
Brazil (BB-)

Brazil (BB-)
BB median

BB median
Jamaica (B+)

Jamaica (B+)

B median
Nigeria (B-)

Nigeria (B-)

Turkiye (B)

S Africa (BB-)
Ecuador (B-)

Egypt (B+)
Brazil (BB-)

BB median

Nigeria (B-)
Jamaica (B+)
Source: Fitch Ratings, National Authorities Source: Fitch Ratings, National Authorities Source: Fitch Ratings, National Authorities

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Fiscal Pressures Building, Limited Fiscal Space

Strong Revenue, but Spending Banks Key Players in Domestic Market Increased External Financing Costs
Pressures Banks share dom.debt (LHS) Egypt 2025 Nigeria 2025
3m yoy average Non-residents share (LHS) Jamaica 2025 S Africa 2026
CG revenue Avg. cost borrowing (LHS)
CG exp Commulative maturity (RHS) Turkiye 2025
CG employee comp (months) (%)
(%) CG current transfers (%)
150 90 120 18
100
120 75 15
80
60 60 12
90
40
45 9
20
60
30 0 6
30 -20
15 3
-40
0 0 -60 0

Sep 21

May 22

Sep 22
Dec 21

Aug 22
Jun 22
Nov 21

Nov 22
Mar 22
Oct 21

Apr 22

Oct 22
Jan 22
Feb 22
Dec 21
May 21
Sep 16

Jul 22
Aug 19
Nov 17
Jun 18

Mar 20
Jan 19

Oct 20
Apr 17

Jul 22
Sep 21

Sep 22
May 22
Dec 21

Aug 22
Aug 21
Jun 21

Nov 21

Jun 22
Mar 22
Apr 22
Oct 21

Oct 22
Jan 22
Feb 22
Jul 21

Jul 22

Source: Fitch Ratings, MoTF & Haver Source: Fitch Ratings, Ministry of Treasury and Finance Source: Fitch Ratings, Eikon

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Economy Slowing, Volatile Growth, Lower GDP Per Capita

Growth Slowdown Underway High but Volatile Growth Higher Growth, Lower GDP Per Capita
Real GDP Composite leading indicator (avg.) Volatility = 10y rollling standard deviation GDP per capita in US dollars, market exchang rates
(% yoy) 2019 5y avg. growth (LHS) 2012 2022F
Growth 2022F (LHS)
25
(%) 2019 GDP volatility (RHS) (pp) (000s USD )
20 8 5 15

15 6 4 12

10 4 3 9

5 2 2 6

0 0 1 3

-5 -2 0 0

Turkiye (B)

B median
S Africa (BB-)
Dom Rep (BB-)

Egypt (B+)
Ecuador (B-)
Turkiye (B)
Egypt (B+)

B median

S Africa (BB-)

Brazil (BB-)
Ecuador (B-)

Brazil (BB-)

BB median

Nigeria (B-)
BB median

Jamaica (B+)

Nigeria (B-)
-10
2Q19
4Q19
2Q20
4Q17
2Q18
4Q18

4Q20
2Q21
4Q21
2Q22

Source: Fitch Ratings, Turkstat & Haver Source: Fitch Ratings, National Authorities Source: Fitch Ratings, National Authorities

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‘Muddling Through’ to 2023: Balance Growth/Employment vs Stability

Macro–Prudential Distorts Domestic Managing Pace/Composition of Credit Managing Depreciation Pressures

Rates TRY loan growth, 13-week annualized TRY EGP SAR BRL COP
WA cost of CBRT funding
3-m TRY dep Consumer Commercial Total (3 Jan 22 = 100)
WA consumer 175
WA commercial loan (%)
(%) 5-y treasury yields 160
42 105

90 145
35
75 130
28 60
115
45
21
100
30
14 85
15

7 0 70
May 22

Sep 22
Dec 21
Aug 21
Jun 21
Nov 20

Nov 22

May 22
Mar 22

Sep 22
Sep 22
Apr 21

Oct 21
Jan 21

Dec 22
Jan 22

Aug 22
Feb 21

Nov 22
Jun 22
Jul 22

Mar 22

Apr 22
Apr 22
Aug 21

Sep 22

Oct 22
Aug 20

Jan 22
Jan 22
Dec 21
Dec 20

Nov 22

Feb 22
Jun 21
Jun 20

Jul 22
Jul 22
Apr 21

Apr 22
Apr 20

Oct 21
Oct 20

Feb 22
Feb 21

Jul 22
Source: Fitch Ratings, CBRT, Haver & Tullet Prebon Source: Fitch Ratings, BRSA & Haver Source: Fitch Ratings,, FRB & Haver

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Political and Economic Challenges Remain After Election

Domestic political challenges Challenges to Maintain 'Stable' Lira Vulnerable CBRT Net FX Position
 High degree of political polarisation TRY (LHS) Net FX position Ex-FX swaps Net FX position
(USD)
REER CPI (RHS)
 Policy priorities and trade-offs REER PPI (RHS) (USDbn)
20 100
 Coalition politics or ‘divided’ government 20
 2024 local elections 16 10
85
Geopolitics & International Relations 0
12 -10
 War in Ukraine: Balance Western/NATO
70
and Russia relations; manage risk of -20
sanctions 8
-30
 US relations: S-400 & CAATSA; US 55 -40
4
cooperation w/ Kurdish forces in Syria; -50
Halkbank
0 40 -60
 EU relations: Eastern Mediterranean

Dec 20
Sep 19

May 21

Aug 22
Nov 18
Jun 18

Mar 22
Oct 21
Jan 18

Apr 19

Feb 20
Jul 20
(boundaries, gas), Cyprus, custom union, -70

May 22
Dec 21

Dec 22
Dec 21

Sep 22
Aug 22
Jun 22
Jun 22
Nov 21

Nov 22
Mar 22

Oct 22
Jan 22

Apr 22
Feb 22

Jul 22
migration
 Rapprochement with regional partners
 Libya, Caucasus, Central Asia Source: Fitch Ratings, CBRT & Haver Source: Fitch Ratings, CBRT & BRSA

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Sovereign Rating Drivers

Positive
✓ Macro: A shift towards a credible and consistent policy mix that stabilises confidence,
improves predictability and reduces macroeconomic and financial stability risks.
✓ External Finances: A reduction in external vulnerabilities, for example due to sustained
narrowing of the current account deficit, increased capital inflows, improvements in the
level and composition of international reserves and reduced dollarisation
Negative
 External Finances: Increased balance of payments pressures, including sustained
reduction in international reserves, for example due to reduced access to external
financing for the sovereign or the private sector and/or sustained widening of the current
account deficit.
 Macro: Continuation of a policy mix that increases macroeconomic and financial stability
risks, for example, an inflation-exchange rate depreciation spiral, weaker depositor
confidence and/or increased vulnerabilities in banks' balance sheets.
 Structural Features: A serious deterioration in the domestic political or security situation
or international relations that severely affects the economy and external finances.

Key Indicators
B/Negative
2021 2022F 2023F 2024F
Real GDP (% change) 11.4 5.6 2.9 2.9 Latest Review
Average inflation (%) 19.6 72.5 59.0 51.2  18 November 2022
Current account balance (% of GDP) -1.7 -6.1 -4.3 -3.8  Affirmation
Government balance (% of GDP) -2.8 -3.3 -4.5 -4.5
Next Calendar Review
 TBD
Government debt (% of GDP) 42.0 34.4 34.0 31.8
Source: Fitch Ratings, November 2022

Türkiye: The Long Road to 2023 12

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