Turkey’s reform package lacks detail, vague on timing - Moody’s

Ratings agency Moody’s said on Friday that a reform package that Turkey presented this week provided little detail and was vague on a timetable for helping revive an economy plagued by inflation and recession.

Finance Minister Berat Albayrak’s announcement, including plans for recapitalization of state banks, was met with lukewarm
reactions from the market and failed to alleviate longstanding concerns about Turkey’s economy.

Moody’s said the plan did not set out the conditions that state banks must meet to receive the $4.9 billion in support.

Albayrak’s measures should not be “simply a vehicle for freeing up banks’ balance sheets to repeat some of the unproductive lending that has taken place in recent years,” it said.

The government has urged banks to provide cheap credit to counter slowing economic activity. It announced a second $4.7-billion package aimed at supporting small- and medium-sized enterprises as recently as March.

Currency crisis

A currency crisis last year saw the lira drop nearly 30 percent against the dollar, driving up the cost of servicing foreign debt for Turkish companies and leading to a build-up of bad loans in Turkey’s banks.

During Wednesday’s presentation Albayrak said that the banking sector believed the current ratio of non-performing loans of 4.2 percent was “quite good”.

Analysts say that level may nearly double this year.

Moody’s said a lack of transparency around the ratio of non-performing loans in the banking sector persisted, adding that the banks’ asset risk continue to deteriorate.

The ratings agency also said the reforms did not include measures to increase flexibility in the labour market or raising education standards to a counter decline in competitiveness and productivity.

“The risk of continued pressure on the lira and wider bond spreads will remain significant without additional clarity and details on the reform measures,” Moody’s said.

The ratings agency also said Turkey’s budget deficit is expected to be 3.3 percent of GDP this year, higher than the government forecast of 2 percent, and it seemed that the government would make adjustments to meet its original target. It said inflation is expected to be 17 percent this year.