A credit rating is an evaluation of the credit worthiness of a debtor (a business (company) or a government) predicting the debtor’s ability to pay back the debt; it thus forecasts implicitly the likelihood of the debtor’s default. The credit rating represents the evaluation of the credit rating agency of qualitative and quantitative information for the debtor; including non-public information obtained by the credit rating agencies’ analysts. Source : WIKIPEDIA
Turkey is an illustrative example to study the role of sovereign risk in emerging market economies because she is characterized by high inﬂation rates, high nominal interest rates and a (perceived) risk of sovereign debt default, combined with the inability to borrow from abroad in their own currency. Turkey’s credit rating changes between speculative and highly speculative investment grade and includes high risk obligations. The reasons for ratings adjustments vary, and may be broadly related to overall shifts in the economy or business environment or more narrowly focused on circumstances affecting a specific industry, entity, or individual debt issue. As a developing country, Turkey felt the impact of public budget crisis on a limited scale. The fiscal discipline (tight fiscal policy) secured following the 2001 crisis played a major role in achieving this. The public finance indicators reveal that as of 2010 Turkey demonstrates a better outlook than almost all developed countries. It is observed that the budget and primary balance and indebtedness ratio figures for Turkey are better than those of the Eurozone countries recently encountering problems.
On the other hand, while the public finance indicators for Turkey demonstrate a better outlook compared to developed countries, its sovereign rating is yet not as high as the investment grade. Despite the improvement in the public finance indicators, Ireland, Portugal and Spain still have better positions than Turkey in terms of credit ranking. It is seen that in the last decade, changes in sovereign rating and in budget , primary balance indicators as well as public debt ratio have not moved in the same direction as would be expected. However, I can say that many countries with sovereign ratings of AAA have higher budget deficits and public debt ratios than Turkey. Several countries with lower sovereign ratings than Turkey also appear to have lower budget deficits and public debt ratios than Turkey. The budget and primary balance and the debt ratios alone are not sufficient in explaining the changes in sovereign ratings. Higher inflation rates may imply a sovereign borrower’s implementation of reckless policies (eg. Excessive spending and borrowing) and this would lead to higher default risk. As we know , this rate has reached three digit level in 1994, currency crisis. Turkey has a highly unfavorable outlook considering the current account deficit that tends upwards along with the economic recovery and the economic growth and real exchange rate volatility which is of critical importance for public debt dynamics. It can be maintained that the fact that a significant proportion of the public debt is denominated in or indexed to foreign exchange is a great impediment to a rise in the sovereign rating.
In general, main reasons of the crisis in Turkey, public debt was not sustainable in an environment of high and volatile inflation as well as instable growth performance, and structural problems could not be solved permanently especially in financial markets. Increasing instabilities in economy caused maturity to shorten for the investors and savings, dollarization and the fragilities of Turkish economy increased. The increase in public sector borrowing requirement put pressure on domestic markets. Economic and politic uncertainties prevented the Treasury to borrow with longer maturity and at more favorable interest rates. The shortening in maturity and the rise in interest rates became more significant during crisis periods. Low level of domestic savings negatively affected the development of financial markets. Unfortunately, developing countries, like Turkey, often make a choice between high growth rate and current account deficit because these countries have to import energy and capital goods. On the other hand, technological recovery is not sufficient in developing countries. Thus, to overcome this handicap, developing countries; for example Turkey, have to increase tendency to saving and investment. While change in credit rating was causing increase in borrowing costs from global markets for public and private sector, it has negatively affected the foreign capital inflows to Turkey. For example, after Turkey’s general election on 7th June 2015, Turkey has faced a new political reality and the turkish lira dropped to record low. Rating agency Fitch has said ‘Political Uncertainty’ in Turkey could increase risk the country’s sovereign credit profile, but said that the possibility also depends on how policy-making is affected. Even though the rating agencies don’t seem focus on much more political uncertainty for credit ratings scale when they identify, they extremely care about it.