Source:
Japan Credit Rating Agency; Upgraded
forex/local of Türkiye to BB- /positive Outlook; Mar 10th, 2005
The ratings reflect the
political stability the current government has attained with its control of
more than two thirds of parliamentary seats, the progress it has made on
structural reforms, based on a standby credit agreement with the IMF, the
macroeconomic stabilization brought by the reforms, and the fact that the
European leaders, in evaluation of the country's reform efforts, decided at
their summit in December 2004 to initiate EU membership talks with Türkiye
on October 3, 2005.
The rating outlook remains
positive
The Turkish government has
agreed with the IMF on a new three-year standby credit facility. The
conditional agreement calls for the government to submit to the parliament
two bills on the banking and the social security reform and to enact the
bill on revenue administration. The execution of the standby credit has
been delayed due to slow progress in legislation of the three bills.
However, JCR expects that the government will eventually move to enact the
bills to pave the way for a formal agreement with the IMF as it is fully
aware of the importance of improving market confidence through the
implementation of structural reforms.
Meanwhile, the European
Commission has urged Türkiye to sign the Protocol on the adaptation of the
Ankara agreement prior to the start of accession negotiations. How Türkiye
will address this matter remains to be seen as it would be the first pact
between Türkiye and the EU since Greek Cyprus joined the EU in May 2004.
The Turkish government will aim to solve the issue of Cyprus, which remains
divided between the North and the South. It is not easy to resolve the
issue which has a complicated background. And it is hard to predict how it
will affect Türkiye's membership negotiations. However, the Turkish
government is firmly resolved to attain the country's EU membership. It
will continue its efforts to that end, although there might be some twists
and turns in the process. If Türkiye can carry out structural reforms on
the strength of its new standby credit agreement with the IMF and various
other reforms aimed to expedite its EU membership, it will be able to
continue improving its internal and external confidence, maintaining a
virtuous circle of subdued inflation expectation and falling real interest
rates, which in turn will spur private consumption and investment. It will
also be able to expect an increase in FDI inflow, which is important to
ensure sustainable development of the Turkish economy. On the other hand,
the ratings are constrained by the country's weak fiscal position and
external debt burden, despite their improving trend in recent years. JCR
will closely watch how the political situation in Iraq will affect Türkiye
as that could become another constraining factor.
(1) Economic situation
Türkiye has realized,
through the implementation of an economic reform program agreed with the
IMF, a virtuous circle of lowering inflation expectation, a fall in real
interest rates and an accompanying expansion of private consumption and
investment. Furthermore, exports mainly to the EU countries grew robustly thanks
to the improved competitiveness of export products supported by the euro's
appreciation and low wages in Türkiye. As a result, the real GDP growth
rate for 2004 is believed to have reached around 8.0%, up from 5.9% the
previous year.
Türkiye also succeeded in
achieving the inflation target for three years in a row, with the inflation
rate cut to 9.3% in December 2004 against the government's target of 12.0%.
The yield on government bonds also decreased to the level of 17% as of
February 2005 from the level of 25% at the end of 2003. The government
carried out currency redenomination and adopted a new currency on January
1, 2005 against the background of the progress made in structural reforms
including the decline of the inflation rate.
Real GDP growth rate
slowed down sharply to 4.5% in the 3rd quarter of 2004 from 13.4% in the
2nd quarter. In the past, volatile economic growth rates were caused by
unstable macroeconomy due to a lack of fiscal discipline. This is unlikely
to repeat since the current economic environment has markedly improved in
this respect. The economic growth is expected to return to a sustainable
level as the base effect of the first half of 2003 and pent-up consumption
demand have weakened. For 2005, a growth rate of around 5.0% will be
achievable, driven by private investment expansion amid continuing growth
of exports and falling real interest rates brought by the ongoing reform
efforts. On the other hand, the current account deficit continued widening
rapidly on a sharp expansion of the trade deficit as strong domestic demand
sent imports soaring. The current account deficit to GDP ratio rose to 4.9%
in 2004 from 3.4% in 2003. However, thanks in part to the government's
tightening measures, domestic demand growth is expected to decelerate.
Furthermore, with exports centering on those to the EU on the steady rise,
the ratio is expected to turn declining in 2005.
In 2004, the government
achieved a primary balance surplus equivalent to 5.8% of GNP against the
target of 5.0%. It also held the fiscal deficit at 7.2% of GNP against the
target of 10.9%. In the 2005 budget, the government envisages a primary
balance surplus equivalent to 5.0% of GNP and a fiscal deficit equal to
6.0% of GNP. As the government has drastically improved its fiscal position
by firmly keeping fiscal discipline, this improving trend is expected to be
maintained for the present.
(2) The economic reform
program with the IMF
Five IMF tranches from the
seventh to the 11th had originally been scheduled to be disbursed in 2004.
The seventh tranche was disbursed in April that year, but the remaining
four tranches were reorganized into three at the request of the Turkish
government. Of these, the IMF conducted its review for the eighth tranche
and disbursed it in August 2004. The ninth review was scheduled for October
2004 and the final 10th review for February 2005. However, the government
later announced that it will conclude a new three-year standby credit
agreement amounting to US$10 billion with the IMF and that the remaining
tranches will be incorporated into the new agreement. This would ease
Türkiye's heavy burden of debt repayment to the IMF scheduled for 2005 and
2006.
The government has so far
carried out a range of reforms. It enacted a bankruptcy-related bill and a
social security reform bill, drafted a bill to enhance the efficiency and
independence of the Regulatory and Supervisory Agencies, and enforced a
public financial management and control law, reforms of direct taxes,
personnel cutbacks in state enterprises and measures to strengthen the
banking sector. Meanwhile, privatization of state enterprises such as TEKEL
and Turkish Airlines amounting in value to US$1 billion was realized in
2004, after bleak results in the three preceding years. Top
