OREANDA-NEWS. Fitch Ratings has affirmed Turkey's Long-term foreign and local currency Issuer Default Ratings (IDR) at 'BBB-' and 'BBB', respectively. The Outlooks are Stable. The issue ratings on Turkey's senior unsecured foreign and local currency bonds have also been affirmed at 'BBB-' and 'BBB', respectively. The Country Ceiling has been affirmed at 'BBB' and the Short-term foreign currency IDR at 'F3'.

The issue ratings on Turkey's Hazine Mustesarligi Varlik Kiralama Anonim Sirketi's (Hazine) global certificates (sukuk) have been affirmed at 'BBB-'.

KEY RATING DRIVERS
The affirmation of Turkey's IDRs and Stable Outlook reflects the following rating drivers:

Fiscal discipline remained in place in 2015 despite the holding of two closely contested parliamentary elections. The central government deficit narrowed slightly to 1.2% of GDP, from 1.3% of GDP in 2014. As a result, general government debt/GDP fell to 32.6% at end-2015, compared with a peer median of 42.6% of GDP. The implementation of pre-election spending commitments is expected to worsen the fiscal position in 2016, with the central government deficit expected to widen to 2% of GDP, but debt/GDP will remain on a downward path. Refugee and security expenses pose expenditure pressures. Rising use of public private partnerships, which are not fully accounted for at the Treasury, are another fiscal risk.

The geopolitical scene has worsened, in Fitch's view. Turkey's involvement in the conflict in neighbouring Syria and the breakdown of the Kurdish peace process appear to have triggered several high-profile terrorist attacks claiming multiple fatalities. A military incident with Russia has seen some bilateral sanctions imposed on Turkey. Elections in November resulting in another term for the AKP have eased domestic political uncertainty, although the prospect of constitutional reform in order to strengthen the powers of presidency means some uncertainties linger.

External vulnerabilities are a key credit weakness. Net external debt is very large compared with peers at an estimated 38.4% of GDP at end-2015, compared with the 'BBB' median of 3.4%, reflecting the financing of persistently large current account deficits. Lower oil prices have driven a cyclical decline in the current account deficit, which has halved in nominal terms between 2013 and 2015 and is forecast at a seven-year low of 3.5% of GDP in 2016. There is no evidence of a structural improvement in the external position.

Gross external financing requirements are very large, at an estimated USD197bn (including short-term debt) in 2016 and the international liquidity ratio, at 71.6% in 2015, is less than half the peer median, exposing Turkey to global financial market conditions. Reliance on short-term borrowing has declined notably due to macro-prudential policy and Fitch assesses that banks have sufficient sources of foreign exchange liquidity to withstand a severe financing shock. Uncertainties over the foreign asset position of Turkish corporates and the impact of higher financing costs are a potential source of vulnerability. Sovereign buffers to volatility in investor sentiment have diminished. Foreign exchange reserves fell by USD12.5bn in 2015 and while still relatively large on a gross basis, at USD115.1bn at end-2015, they are around one-third of this in net terms. Nonetheless, external debt rollover rates continue to exceed 100%.

Growth is comfortably in excess of peers, averaging 4.4% over 2011-2015 compared with a peer median of 3.2%. Fitch forecasts a slight moderation in growth, to around 3.5% in 2016 and 2017, and growth will be consumption-driven, reflecting the hike in the minimum wage, lower oil prices and a fairly loose policy stance. The impact of Russian sanctions will be gradually offset by deeper economic relations with Iran and a modest strengthening of the Eurozone.

Inflation and inflation volatility are well in excess of peers and Fitch assumes that pressure from recent currency depreciation and the minimum wage hike will push it into double digits during 2016. A plan to simplify the monetary policy framework that could over time address concerns about policy coherence has been delayed. Changes to key personnel at the Central Bank are potentially imminent and the organisation has faced some political pressure on interest rate policy in the recent past.

The banking system is consistent with Turkey's investment grade rating, with a 'bbb' on Fitch's Banking System Indicator. Banks are well regulated, profitable and non-performing loans were 3.1% at end-2015.

RATING SENSITIVITIES
The following risk factors individually, or collectively, could trigger negative rating action:
- A materialisation of stresses stemming from external financing vulnerabilities.
- Prolonged and deepened political instability, insecurity or geopolitical stresses that undermine economic performance and threaten economic policy credibility.
- A deterioration in the macro policy framework that results in a reversal in the declining trend in debt/GDP and/or a worsening of external imbalances.

Conversely, the following factors, individually or collectively, could result in positive rating action:
- Implementation of structural reforms that deliver higher gross domestic savings, a more flexible labour market and greater foreign direct investment to help address external imbalances.
- A more stable and predictable domestic political and security environment.
- A more coherent and predictable monetary policy framework that delivers lower and more stable inflation.

KEY ASSUMPTIONS
- Continued commitment to fiscal stability.

- Turkey's current account deficit will benefit from low oil prices (Fitch forecasts Brent crude to average USD35/b in 2016 and USD45 by 2016) and economic recovery strengthening in the EU.