S&P calls for Turkish reforms, independent judiciary

“With the recent general election in Turkey, a period of domestic political instability has ended; yet, the outlook on the ‘BB+’ rating is still negative,” the S&P said in a report on Friday.

The agency asserted the implementation of long-delayed reforms is “particularly important” for their ratings analysis. “Therefore, the implementation of effective reforms to reduce the economy’s reliance on foreign debt financing, while sustaining economic expansion sufficient to absorb most of the fast growth of the labor force, could lead us to revise the outlook to stable,” the report read.

It added that pressure on independent Turkish institutions such as the central bank, the banking supervision agency and the judiciary has increased in recent years. The process of rebalancing could also be aided by the easing of this pressure, the S&P report noted.

Among the key findings in Friday’s report was that the S&P cites Turkey as being “particularly vulnerable” to risks related to tightening international liquidity as the US Federal Reserve raises interest rates.

The agency said Turkey’s reliance on short-term external debt, especially in its banking sector, maximizes the country’s vulnerability to external shocks. “Turkey, Lebanon, and Venezuela are among the most susceptible to a spike in global interest rates,” the report noted, also adding that Turkey is one of the three most vulnerable economies to excessive domestic financial leverage along with Venezuela, and China.

Meanwhile, in a separate report on Friday, rival ratings agency Fitch said the outlook for Turkey’s banking sector is stable, supported by expectations that loss-absorption capacity will remain adequate. “Our base case is that lenders’ key financial metrics in 2016 should remain broadly in line with current levels. But downside risks for the sector have increased, and from 2016 banks will also have to meet additional Basel III capital buffers that will underpin quite healthy solvency ratios,” Fitch said.