TEPAV: "Turkey’s Sovereign Rating Cannot be Upgraded Easily " TEPAV stated that Turkey strongly needs a new economic program to enjoy an improvement in sovereign rating beyond the level enabled by the success following the 2001 crisis.

ANKARA- TEPAV answered the long-debated question why Turkey's sovereign rating is not upgraded and emphasized that the problem stems from a number of factors including current account deficit, and volatility of growth and of exchange rate. Stressing that if the current circumstances prevail, it is least likely for the rating to be improved,  TEPAV said  "Turkey strongly needs a new economic program to enjoy an improvement in sovereign rating beyond the level enabled by the success following the 2001 crisis."

Policy note with the title "Sovereign rating cannot be upgraded without structural reforms" by TEPAV Economic Policy Analyst Ozan Acar was published. The note includes the results of a study Acar conducted as a fellow researcher in the Brookings Institute Global Economy and Development Program directed by Kemal Derviş.

The study drew attention to the impacts of the global crisis and said that the impact of the crisis on the public finance has been devastating in Greece, Ireland, Portugal and Spain.  Maintaining that Turkey's recent the public finance performance has outpaced those of the mentioned countries, the note said Turkey's sovereign rating however has not improved to the investment grade despite the named positive developments. The note stressed that Turkey holds an advantageous position compared to the EZ countries in terms of the ratio of public debt and the budget deficit, whereas the country is still disadvantageous considering the factors shown in the study to be more influential on sovereign ratings. The factors were summarized as follows:

"- In Turkey the share of interest expenses in the budget revenues is far above those in the developed countries, including the EZ countries.

- It is seen that 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."

The rating cannot be upgraded easily

TEPAV Policy Note argued that the budget deficit and public debt ratio alone are not powerful enough to determine the sovereign ratings of particular countries and said: " This does not mean that the said indicators have no effect at all on Turkey's sovereign rating. Therefore, it is of significance to maintain the improvements in the public finance in increasing investors' confidence in Turkey's economy." Stressing that the IMF foresees a positive outlook for Turkey's future budget balance, primary balance and the debt ratio and a horizontal outlook for the ratio of budget revenues to the national income, the note added that these estimates are in harmony with the medium term economic program announced by the government. The note continued:

" However, for the realization of these estimates it is of critical importance to secure that the general and local elections to be held in July 2011 and March 2014 do not have negative impacts on the budget. In this context, it can be said that giving over the fiscal rule has reduced the confidence in the estimates for the public finance indicators."

The note said the share of primary expenditures in the budget revenues, the share of the current account balance in the national income, the real interest rate and the stability of growth as fundamental variables determining the sovereign rating.

Underlining that the share of interest expenses in the budget revenues will decrease continuously until 2015 as the IMF estimates reveal, the note said: " It is expected that if the estimates are realized, Turkey's capacity to fulfill its financial liabilities duly and timely and thus its sovereign rating would be improved. Nevertheless, it is of critical importance to adopt a consistent the public finance policy framework."

The note maintained that the share of current account balance to the national income is another important indicator considered by the credit rating agencies. The note reminded that the IMF estimates that Turkey's current account deficit will rise gradually until 2015 and added: "Given that in periods of economic growth, Turkey's current account deficit rises, the IMF's estimate is in harmony with the 5 percent average growth estimated for the 2011-2015 period. It can therefore be concluded that the high current account deficit and the risks coming to the fore in this way would hinder improvement in Turkey's sovereign rating up to the investment grade."

The note stressed that the stability of the real exchange rate and growth will play crucial roles in the changes of Turkey's sovereign rating, and went on to say that in the current milieu where there are a number of ambiguities about the impact of the global crisis on Europe and its repercussions on the US economy it is difficult to estimate the real exchange rate and economic growth. The note continued:

"Developments in Turkey's export markets and the degree of sustainability of growth based on domestic demand will be the main determinants of the growth. Developments regarding the global liquidity are critically important but difficult to foresee. It must be noted, however, that as a positive development the Central Bank of Turkey declared that the exchange rate would be given higher importance in the design of the country's monetary policy."

New economic program needed

TEPAV Policy Note emphasized that a new economic program is necessary to ensure that Turkey's sovereign rating is improved beyond the levels attained through the economic program put into effect after the 2001 crisis. The note concluded:

"This new economic program must be designed taking into consideration the elements shown to have an effect on the sovereign rating. There is need for a framework that would prevent increases in the current account deficit and limit the volatility in growth and real exchange rate. Given that interest expenses correspond to a high share in overall budget revenues, a comprehensive tax and tax administration reform that would increase the share of tax revenues in the national income is required. In this context, it would be wise to put into effect a structural reform program that would focus on micro reform areas, particularly on the 'private sector competitiveness' involved in the criteria set of the CRAs."