Turkey's S&P credit rating stays at BB+

Credit rating agency Standard & Poor’s confirmed Turkey's foreign currency rating at BB+ and the Turkish lira sovereign rating at BBB- on Friday.

A statement from the agency cited Turkey’s flexible exchange rate and relatively well-capitalized banking system as being capable of absorbing future external shocks.

However, the U.S.-based agency said the outlook remained negative and outlined a scenario in which “external financing becomes both more expensive and scarcer and institutional checks and balances deteriorate further”.

The agency forecast real gross domestic product (GDP) would grow by 3.1 percent in 2015.

Following Sunday’s election victory for the Justice and Development (AK) Party, the agency predicted that “current policy settings will prevail, implying real GDP growth averaging 2.7 percent in 2016-2018 and unemployment staying at about 10 percent.”

It added: “Although Turkey's economy benefited from stronger-than-anticipated demand in the first half of this year, we think political uncertainty in the run-up to the November elections is likely to have weighed on growth in the second half.”

The agency said it expected government debt levels to remain “manageable” and Turkish banks to remain well-regulated and sufficiently capitalized in the absence of “external shocks”.

Standard & Poor’s said the Turkish authorities had accurately flagged key risks in the past, such as “high and recurrent” external deficits resulting from low domestic savings rate.

It noted that a plan is in place to raise savings, deepen domestic capital markets and cut the cost of imported energy while improving women’s participation in the labor market and reducing the informal economy.

However, implementation of the plan was described as “modest” and should accelerate if Turkey is to “shift away from its current economic growth model, which still depends highly on net debt financing from abroad” and on central banks’ monetary policy.

The agency added: “The uncertain global economic environment, particularly a possible reversal in historically low U.S. interest rates could, in our opinion, raise real interest rates in Turkey. This could exacerbate any slowdown and in turn reduce the risk appetite of nonresident investors in Turkey's government debt and equity markets.”

Further government intervention in the independence of institutions such as the central bank could lead to more sluggish growth and lower ratings, the statement said, while falling oil prices should benefit the economy’s net financing position.