Graphique :

February 2005

Yves Zlotowski

The Country @rating for Turkish companies is currently B and was positive watchlisted in January this year. Robust economic conditions, the quality of company payment behaviour, and the confidence of market operators have all contributed to justifying the positive watchlisting. The current euphoria surrounding Turkey should nonetheless not lead to disregard for financial risks. The investment and export boom has caused the current account deficit to widen while the Turkish lira has been appreciating. Foreign exchange risk has thus been high with companies — unable to obtain credits from domestic banks to finance their expansion — increasingly assuming foreign currency debt. A soft landing for the economy in 2005 will be desirable and everything now seems to argue in favour of such a scenario.

The scale-of-risk chart below provides a qualitative assessment of the seven types of risk considered in determining Country @ratings. The various risks are represented on a scale of four increasing levels from non-significant to manageable, significant, and critical. That chart gives a snapshot view of the various types of risk.

[Payment indices
Payment default indices reflect worldwide payment incident trends on commercial transactions payable in the short-term and for a broad range of economic sectors.
Such monitoring of payment incidents is based on a composite of several sets of company payment-capacity indicators available in Coface group databases including those derived directly from its activities in credit insurance, receivables management, and company information activities and those obtained from partners.
Payment incidents are expressed as indices whose base is the world average for incidents recorded from 1995 to 2000. The graphs presented thus not only makes it possible to compare the payment risk level for a country or sector with the world average but also to monitor trends for those risks. ]

The Coface payment-incident-index trend for Turkey has shown sharp improvement in company behaviour since the 2001 crisis. Economic volatility has caused several payment default peaks since the 1980s, generally followed by progressive easing with companies succeeding in settling debts after due dates according to negotiated payment plans. Since mid-2002, the payment incident index has been well below the world average. The very good company payment behaviour prompted the upgrading of the Country @rating from C to B in June 2004 with the B rating then positive watchlisted in January 2005.

Growth Vulnerability: non-significant risk
Growth was very robust in 2004, gaining 9%. Investment notably registered an extraordinary rebound (up 50% for private investment). Economic activity probably overheated to an extent commensurate or aligned with the demand boom while external accounts deteriorated sharply. A soft landing of the economy is expected in 2005 (6% growth forecasted). Disinflation has also been a resounding economic policy success with consumer prices rising 10.5% in 2004 and a "single-digit" increase highly likely in 2005 (7.5% according to forecasts).

Sovereign vulnerability: significant risk
Despite the persistence of major imbalances, Turkish public sector finances have posted a very sharp improvement since 2001. The public deficit thus declined from 18% of GNP in 2001 to 8.2% in 2004. Fiscal policy has been particularly tight and public finances have benefited from an interest rate decline linked to renewed market operator confidence. Although public sector debt has remained very high, the dynamic has been favourable. After exceeding 100% of GNP in 2001, debt eased to 75% in 2004.

Although signature of a new IMF agreement in 2005 augurs continued tight fiscal policy and consequently continued decline of the public sector debt burden, the Turkish public sector's financial situation will remain very dependent on market sentiment with the government compelled to go to the markets to refinance its debt in local and foreign currency. There will nonetheless be little likelihood of an "Argentina-type" financial crisis developing in the near-term and that likelihood has been trending down in the past two years. De facto solidarity between Turkish entities has been limiting short-term default risk. A substantial proportion of outstanding Turkish lira debt can be refinanced almost automatically since it is held by state-owned banks and public entities.

External over indebtedness: significant risk
Despite export dynamism (Turkish companies continued to take market share in 2004), the current account balance deteriorated markedly last year reaching 5% of GNP. Foreign currency financing needs (current account balance + foreign-currency debt service) have thus been among the largest among emerging countries. Relying almost entirely on debt to cover those needs, Turkey has continued to struggle to attract more stable forms of investment with foreign direct investment inflows representing only 6.8% of financing needs in 2004 (against 25% for Poland, for example). Although foreign debt ratios have remained high, they have been falling sharply with foreign debt going from 234% of goods and services exports 2002 to 183% in 2004.

Risk associated with private sector debt has been appreciable. Lacking available domestic credit, Turkish companies have been increasingly assuming foreign currency debt. Their debt has thus been vulnerable to foreign exchange risk: the IMF has estimated that foreign currency debt not covered by foreign currency earnings amounts to $35.7 billion.

Foreign currency liquidity crisis: critical risk
The country has remained dependent on volatile capital mainly reflecting dealings of residents arbitraging between dollar and lira assets (mainly Treasury bonds). The private sector has been responsible for short-term foreign-currency debt, which has been increasing. Outstanding short-term debt represented 120% of foreign currency reserves end 2004. The widening current account deficit could prompt a new exchange rate adjustment — the lira rose 4% against the dollar in 2004 — that could cause payment difficulties for companies increasingly exposed to foreign exchange risk.

Banking sector's fragilities: significant risk
Despite very substantial progress on banking system reform since 2001 (the cost of restructuring banks has been estimated at 32% of GNP), there are still several challenges for the financial system:

§ Banks have remained very exposed to sovereign risk with their profitability still very dependent on the rate of return on public sector securities. Fostering a more active role for banks in financing the private sector can only be achieved very progressively.

§ Regarding state-owned banks, an exorbitant government-securities burden (including a high proportion of non-negotiable securities) has been a major obstacle to possible privatisations.

§ As for private banks, discontinuation of lending to shareholders — even spurred by the need to comply with regulations that now stipulate a 25% ceiling on connected loans in relation to capital — will be a delicate matter: for large banks, lending to powerful shareholders has also constituted precautionary strategy in a system where smaller companies are self-financed and where their accounting systems are often very inadequate.

Political and institutional instability: manageable risk
The country is currently enjoying unprecedented stability. The AK Party has an absolute Assembly majority since the early elections of November 2002. Its victory in the April 2004 municipal elections with 42% of the votes confirmed the political pre-eminence of Prime Minister R. Erdogan's party. At this stage, the country's political stability seems assured until the next elections to be held in 2006 at the earliest.

Several elements of uncertainty have nonetheless persisted. The Cyprus status question and the Kurdish minority situation (with the possible emergence of an autonomous Kurdish state in Iraq) have remained potential sources of conflict. The secularism debate could also have a destabilising influence on the political situation. The European Council's December 2004 decision to open accession negotiations is a major confidence-building factor and provide a framework very conducive to pursuing structural reforms.

In conclusion, the soft economic landing expected in 2005 should not alter the favourable assessment of the Turkish country risk trend. Coface's payment experience with companies has been very good and economic policy, underpinned by new IMF agreement, should continue to hold a tight course. Many factors thus suggest that Turkish-company risk will continue to decline on average. The trend of Turkey's financial situation — notably the public-debt dynamic and the country's foreign currency liquidity situation — nonetheless deserves to be watched closely since major financial weaknesses have persisted substantial despite the spectacular progress made in recent years.

DISCLAIMER : The present document reflects the opinion of COFACE Country Risk and Economic Studies Department, as of the date hereof and according to the information available at this date; it may be modified at any moment without notice. Information, analysis, and opinions contained herein have been elaborated from numerous sources believed to be reliable and serious; however, COFACE does not guarantee in any manner whatsoever that the data contained herein are true, accurate and complete. Information, analysis, and opinions are provided for information purpose only and as a complement to material or information which shall be collected otherwise by the user. COFACE does not have any procurement obligation but only obligation of means and shall incur no liability whatsoever for losses arising from the use of or reliance on the information, analysis and opinion herein provided. This document together with analysis and opinions furnished are the valuable intellectual property of COFACE; you may download some of the data for internal use only, provided that you mention COFACE as author and you do not modify or alter such data. You may not use, extract or reproduce the data in whole or in part, for making any public statement or for any other commercial purpose without our prior written consent. You are invited to refer to the legal notice provided on COFACE web site.