DBRS Sovereign Methodology Update Has No Impact on Turkey’s Issuer Ratings

DBRS, Inc. (DBRS) has determined that changes to its sovereign methodology, Rating Sovereign Governments, have no impact on the Republic of Turkey’s Long-Term Local Currency – Issuer Rating (BBB (low) with a Negative trend), Long-Term Foreign Currency – Issuer Rating (BB (high) with a Negative trend), Short-Term Local Currency – Issuer Rating (R-2 (middle), with a Negative trend), or Short-Term Foreign Currency – Issuer Rating (R-3, with a Negative trend). Rating drivers also remain unchanged from DBRS’s last rating report on Turkey (see http://www.dbrs.com/issuer/19320).

On October 10th, 2017, DBRS requested comments on an update to its sovereign methodology. Following the conclusion of that comment period, the final methodology was published on November 27. As noted in the October 10th press release, the updated methodology revises the approach used to determine whether a differential between foreign and local currency issuer ratings is warranted. As a result of the methodology change, DBRS expected that there would be only a limited number of cases among its existing sovereign ratings where local and foreign currency issuer ratings would differ. Consequently, the October 10th press release indicated that these refinements might have an impact on the ratings of Argentina, Brazil, Colombia, Mexico, and Turkey, most likely affecting the local currency issuer rating.

Applying the revised methodology, the one notch differential between Turkey’s Foreign and Local Currency – Issuer Ratings remains appropriate. In the event of a deterioration in credit fundamentals, DBRS believes that Turkey could face material constraints on its access to foreign exchange. This reflects the extent of foreign currency borrowing within the economy and the potential use of foreign exchange reserves to support the lira. Evidence that the government would assign a higher priority to payment of local currency debt is mixed. Nonetheless, local currency debt appears somewhat less likely to be restructured due to the profile of major holders of the debt, as it is held predominantly by public sector entities and domestic banks. Accordingly, DBRS considers the risk of a default on Turkey’s foreign currency debt to be somewhat higher than the risk of a default on local currency debt.

A change in the relative default risk between foreign and local currency debt could lead to a change in the differential between the Foreign and Local Currency – Issuer Ratings. Factors underlying such a change could include, for example, a stronger external position that reduces the risk of material constraints on Turkey’s access to foreign exchange.

Notes:
All figures are in U.S. Dollars unless otherwise noted.

The principal applicable methodology is Rating Sovereign Governments, which can be found on the DBRS website under Methodologies. The principal applicable rating policies are Commercial Paper and Short-Term Debt, and Short-Term and Long-Term Rating Relationships, which can be found on our website under Rating Scales. These can be found at http://www.dbrs.com/about/methodologies.

The sources of information used for this rating include Central Bank of the Republic of Turkey, Ministry of Finance, Undersecretariat of Treasury, Turkish Statistical Institute, International Monetary Fund, World Bank, Haver Analytics, and DBRS. DBRS considers the information available to it for the purposes of providing this rating was of satisfactory quality.

This rating was not initiated at the request of the rated entity.

The rated entity or its related entities did participate in the rating process. DBRS did not have access to the accounts and other relevant internal documents of the rated entity or its related entities.

Generally, the conditions that lead to the assignment of a Negative or Positive Trend are resolved within a twelve month period while reviews are generally resolved within 90 days. DBRS’s trends and ratings are under constant surveillance.

Lead Analyst: Rohini Malkani, Senior Vice President, Global Sovereign Ratings
Rating Committee Chair: Roger Lister, Managing Director, Chief Credit Officer, Global Financial Institutions Group and Sovereign Ratings
Initial Rating Date: 23 May 2013
Last Rating Date: 17 February 2017

Information regarding DBRS ratings, including definitions, policies and methodologies, is available on www.dbrs.com.