Turkey to Retain Its Low Credit Ratings

Turkey, the fastest growing economy after China, retains its low credit ratings due to its failure to promote consumer savings.

Turkish economy has grown at an average pace of 5.9 percent since 2002, and its bonds are showing the fastest recovery among emerging markets.

However, the rapid growth in consumer lending has partially contributed to the unsustainable widening of Turkey's current-account deficit, which is a risk to overall stability of the country's economy.

Fitch Ratings cut its outlook for Turkey to “stable” from “positive” last year, saying the low savings rate made Turkey susceptible to macroeconomic volatility. Fitch rates Turkey BB+, one level below investment grade. Moody's Investors Service rates it at Ba2, two steps below. Turkey's ratings are positioned at the same level as Serbia and Guatemala, whose economies are about a twentieth its size. S&P rates Turkish debt at BB level, similar to Macedonia, Portugal and Jordan and one level above Mongolia and Vietnam.

The savings rate for Turkey is estimated by the IMF at less than 14 percent of GDP, which is the lowest in the world for any economy larger than $100 billion, except for Portugal, Ireland and Greece. An expansion in consumer lending last year of as much as 40 percent has increased indebtedness and widened the current-account deficit that became more than 10 percent of GDP. According to some experts, Turkey is the most vulnerable economy in Eastern Europe, the Middle East and Africa.

Fewer than 45,000 people in a country of 74 million, or less than 0.1 percent, account for 47 percent of the total deposits in the banking industry. Around 30 percent of loans go to people making less than $575 a month, and 55 percent to those earning less than $1,200 a month. The numbers suggest that 0.1 percent of depositors in Turkey are financially well-off, while 99.9 percent of individuals are heavily indebted and many companies and households are practically insolvent.

Currently Turkey's non-performing loan ratio remains low at 2.7 percent, but it will increase as economic growth slows. According to some experts, the ratio of non-performing loans in Turkey will grow next year to 4.1 percent of total loans from 2.7 percent in October.

The yield on Turkey's bonds denominated in dollars has fallen 41 basis points this year to 5.35 percent. The improvement trails a 44 average basis point decrease in emerging market yields to 5.6 percent. Turkey's local-currency government bonds have returned 13 percent in dollar terms so far this year, more than any other emerging-market debt.

Source: Bloomberg