S&P Global Ratings officials announced that the developments regarding the liquidation process of some funds in Türkiye are not expected to create a downward pressure on the country's credit rating.
S&P Global Ratings is expected to publish this year's second credit rating and outlook assessment for Türkiye on October 16. In its last assessment in April, the organization confirmed Türkiye's credit rating as "BB-/B" and maintained its rating outlook as "stable".
While S&P Global Ratings Central and Eastern Europe (CEE) and Commonwealth of Independent States (CIS) Country Credit Ratings Director and Lead Analyst Karen Vartapetov and Financial Institutions Director Regina Argenio refrained from giving details about the upcoming rating decision, they answered AA correspondent's questions about the possible effects of the ongoing fund investigation on the credit rating and Türkiye's economic outlook.
Vartapetov stated that the regulations and policy response put forward by the authorities within the scope of the fund investigation were "quick and convincing" and added: "They managed to bring it under control and did not have a negative impact on the financial system more broadly." he said.
Vartapetov stated that there is not much evidence showing that the process negatively affects the trust and perception towards the Turkish economy, and continued his speech as follows:
"In terms of macroeconomic impacts and consequences, we have not seen much improvement yet. It seems to be a rather isolated situation so far. There has not been much of a reaction in the areas we examined in Türkiye, such as the exchange rate, dollarization, finance and financial liquidity of the banking sector. There may be questions about the quality of governance, the rule of law, the effectiveness of policy-making. But I think we are being quite conservative in evaluating this part of the credit profile in Türkiye. This is already part of our rating structure. Therefore, if the development regarding the funds remains isolated, I do not think it will create downward pressure in terms of credit rating. Funds "I think the negative effects will be limited if the crisis remains isolated and households continue to have confidence in real currency assets."
Vartapetov stated that the credit rating was determined as a result of a committee decision and that these important developments regarding the funds will definitely be discussed in the committee.
Noting that they will probably highlight this process as a risk, Vartapetov stated that they have not yet seen any clear evidence that this will have significant macro effects.
Vartapetov emphasized that he did not think that the process would have a "game-changing" effect in terms of investor sentiment "if it is limited to a narrow asset class."
RECOVERY IN RESERVES "SUPPORTS" CREDIT RATING
Karen Vartapetov also shared her assessments regarding the growth and inflation outlook for the Turkish economy and international reserves.
Stating that they foresee the average inflation in Türkiye at 30 percent this year, Vartapetov noted that they expect economic growth to be close to 3 percent.
Stating that reserve adequacy is one of the most important parameters in terms of credit rating, Vartapetov said, "Turkey started this year at a very high level, reserves were at a record level. The Central Bank used some of the reserves to control the negative effects resulting from the increase in energy prices, but later replaced some of them. Therefore, the reserves are slightly below the January-February levels in terms of gross level, but the recovery in reserves is supportive of the credit rating." made his assessment.
Noting that net reserves are not as high as gross, but have recovered, Vartapetov concluded his speech as follows:
"Another issue we have focused on over the last few years (in terms of country rating) is the behavior of households. Will households still prefer the lira or lira-denominated assets and bank deposits, or will they switch to the dollar and put pressure on foreign exchange reserves? This has been a key variable so far. Despite geopolitical developments in the Middle East, high energy prices and the funds-related process, households' attitude towards the lira has remained quite strong. There is little evidence of a resurgence of dollarisation." "We haven't seen any signs that the dollarization of the financial system has increased."
POLITICAL REACTION SO FAR IS “QUITE STRONG”
S&P Global Ratings Financial Institutions Director Regina Argenio stated that the biggest impact on the fund process was seen in the stock market and there was a decrease in stock valuation. "However, beyond the first correction, we saw that the valuation stabilized. Since the data came with a slight delay, it may not reflect the full picture yet, but when we look at the liquidity in banks, we did not see a big movement." he said.
Stating that it is important that this process remains isolated with relevant funds, Argenio said that the policy response to date has been "quite strong".
Argenio stated that beyond the judicial processes, liquidity was provided to the market and banks were appointed to liquidate the funds.
