Moody's upgrades Turkiye's ratings to Ba3, changes outlook to stable
It also upgraded the foreign-currency backed senior unsecured rating of Hazine Mustesarligi Varlik Kiralama A.S. to Ba3 from B1. The entity is a special purpose vehicle wholly owned by the Turkish government from which the treasury issues sukuk certificates (Islamic financial certificates, similar to a bond in Western finance).
Moody's Ratings recently upgraded Turkiye's long-term foreign- and domestic-currency issuer and foreign-currency senior unsecured ratings to Ba3 from B1 and changed the outlook to stable from positive. The upgrade reflects the strengthening track record of effective policymaking. The central bank's foreign currency buffers are relatively weak compared to the gross external financing needs.
'We consider the liabilities of this entity to be an ultimate obligation of the government of Turkiye. The outlook on Hazine Mustesarligi Varlik Kiralama A.S. has also been changed to stable from positive,' Moody's said in a release.
The upgrade reflects the strengthening track record of effective policymaking, more specifically in the central bank's adherence to monetary policy that durably eases inflationary pressures, reduces economic imbalances, and gradually restores local depositor and foreign investor confidence in the Turkish lira, the rating agency noted.
It also reflects the view that the risk of a policy reversal has receded, although it will remain present in the coming years.
The stable outlook balances upside and downside risks to Turkiye's credit profile. On the upside, extending the track record of effective policymaking without political interference has the potential to support the improvement in Turkiye's external position more substantially than Moody's currently assumes.
Furthermore, the government's ongoing and planned structural reforms could improve Turkiye's resilience to external shocks by further reducing its energy import dependence and increasing the competitiveness of exports.
A possible return to policies that would again fuel economic imbalances represents a key downside risk. Given its still relatively weak external position, captured by the central bank's comparatively modest foreign-currency buffers, Turkiye also remains vulnerable to large balance of payments shocks, Moody's observed.
Concurrently, Moody's raised Turkiye's local-currency country ceiling to Baa3 from Ba1. The three-notch gap between the local-currency ceiling and the sovereign issuer rating reflects the improving track record of monetary and macroeconomic policy effectiveness and a relatively limited government footprint in the economy.
These factors are balanced against Turkiye's exposure to elevated political risks and the risk of a reversal in the current policy direction.
In addition, the foreign-currency ceiling has been raised to Ba2 from Ba3.
The two-notch gap between the foreign-currency and local-currency ceilings reflects the central bank's still relatively weak foreign currency buffers compared to the country's gross external financing needs and the latent risk of a return to previous policy settings, in which regulatory measures were used to suppress foreign currency demand.
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