July 21, 2017 / 8:11 PM / a year ago

Fitch Affirms Turkey at 'BB+'; Outlook Stable

(The following statement was released by the rating agency) LONDON, July 21 (Fitch) Fitch Ratings has revised the Outlook on Spain's Long-Term Foreign- and Local-Currency Issuer Default Ratings (IDRs) to Positive from Stable and affirmed the IDRs at 'BBB+'. The Country Ceiling has been affirmed at 'AA+' and the Short-Term Foreign and Local Currency IDRs at 'F2'. The long- and short-term issue ratings on Spain's senior unsecured foreign and local currency debt have also been affirmed at 'BBB+'/'F2'. KEY RATING DRIVERS The revision of the Outlook to Positive reflects the following key rating drivers and their relative weights: MEDIUM Near-term budget implementation risks have reduced, and Fitch expects faster deficit reduction in 2017 than in recent years. Approval for the 2017 budget has been secured, and the 2018 expenditure ceiling has been agreed, at 1.3% above this year's ceiling. We forecast a fall in the general government deficit from 4.5% of GDP in 2016, to 3.2% this year and 2.5% next, driven by the cyclical economic recovery. Two-thirds of the deficit reduction this year is expected to fall on the expenditure side, with revenue measures agreed since late last year, particularly for corporate tax, supporting a 0.4% of GDP increase in revenues. Economic recovery remains strong and relatively broad-based, with some further progress made in reducing macroeconomic imbalances. GDP growth in 1H17 matched last year's 3.2%, fuelled by strong labour market dynamics. Unemployment fell to 17.7% in May from 20.2% a year earlier, helped by greater labour market flexibility from earlier structural reforms. Deleveraging has continued, with private sector non-financial debt falling 6.6pp in the year to 1Q17 (and 48.9pp since 2010) to 165.2% of GDP. Fitch forecasts GDP growth of 3.1% in 2017 with higher private investment offsetting the withdrawal of fiscal stimulus and the dampening effect of higher inflation on consumer spending. We forecast a moderation in GDP growth to 2.5% in 2018 and 2.2% in 2019 as spare capacity in the economy is steadily absorbed. Spain's external adjustment has continued, with the current account surplus increasing to 2.0% of GDP in 2016, from 1.4% in 2015. This was driven by an improvement in the trade balance, and export volumes have grown strongly in 1Q17. The current account balance has improved by 11.7% of GDP since the onset of the financial crisis, with exports accounting for more of the adjustment in recent years, supported by a fall in unit labour costs (of 2.5% in 2016 and 15.6% since 2009) and a greater propensity of Spanish firms to export. Fitch forecasts a moderate reduction in the current account surplus, to 1.7% of GDP in 2019. Net external debt fell to 84.6% of GDP in 2016, from 92.0% in 2015, but is still elevated and compares with a 'BBB' rating median of 3.2% of GDP. The 'BBB+' IDRs also reflect the following key rating drivers: Spain has a diversified and high value-added economy (with GDP per capita almost three times the 'BBB' median), strong institutions relative to rating peers, an extremely low average yield at issuance (currently 0.7%), and a negligible share of foreign currency debt. Set against this are Spain's very high level of gross general government debt to GDP (GGGD/GDP), an external leverage amongst the highest of Fitch-rated countries, the still high unemployment rate, and political risk. Fitch forecasts a reduction in GGGD/GDP to 98.8% in 2017 and 97.9% in 2018, from 99.4% in 2016 (having peaked at 100.4% in 2014). This is a similar reduction to the previous two years despite the falling deficit, due to changes in stock-flow assumptions. In 2015 and 2016, large debt-reducing adjustments (totalling 2.1% of GDP and 1.6% respectively), including from the sale of financial assets and a reduction in central government deposits, more than offset sizeable fiscal slippage. By contrast, we assume a positive stock-flow adjustment of 0.4% of GDP in 2017, in line with the current Stability Programme. According to our long-term debt sustainability analysis, GGGP/GDP continues to fall only gradually, to 95.3% in 2020, and 91.4% in 2026, and compares with a 'BBB' median of 41.2%. We expect tensions between the central and Catalonia regional government to increase over the next few months, but without any significant disruption to the economy or government functioning. The Catalonia regional government has announced it will hold a referendum on independence, on 1 October, which is likely to be declared unconstitutional in the Spanish courts. It is currently unclear how the referendum process would then play out. Fitch also considers that differing policy priorities within the Catalonia regional coalition government increase the likelihood of an early regional election, particularly if any referendum does not deliver a decisive outcome in favour of secession. More broadly, Fitch does not observe progress this year in advancing measures that we consider would form the basis of a mutually acceptable agreement between the national and Catalonia regional government. The Spanish constitution does not allow for full independence, and our base-case assumption continues to be that there will be a settlement on regional reform and greater autonomy for Catalonia within Spain, but that this will be a challenging and potentially drawn-out process. The near-term stability of the minority PP government has been bolstered by the recent approval of the 2017 budget. Agreement on the 2018 expenditure ceiling has also increased the likelihood of securing approval for the 2018 budget, and should this not be forthcoming there is the possibility of rolling forward this year's budget. However, there is a risk that further into the parliament it will prove harder to sustain opposition support and we continue to see limited prospects of substantial new economic reform, particularly as the potential for policy support from the Socialist Party has diminished over recent months, in our view. The government is instead expected to focus on protecting earlier structural reforms, with only limited new measures, for example on active labour market programmes. There has been a steady improvement in Spanish banks' credit fundamentals. The NPL ratio fell by 1pp in the year to April, to 8.9%, and problem real estate assets have also declined at most banks, while the CET1 capital ratio has edged up to 12.8% from 12.6% a year earlier. The resolution of Banco Popular has not materially affected our overall view of the sector, as it was a bank-specific issue dealt with effectively and without recourse to public funds. The key challenge continues to be to further improve asset quality, pressures on profitability from low interest rate margins, intense competition, and the phase-in of additional regulatory requirements. Aggregate credit has continued to fall, but new loan growth is recovering more quickly, helping support better-quality, more productive activities. SOVEREIGN RATING MODEL (SRM) and QUALITATIVE OVERLAY (QO) Fitch's proprietary SRM assigns Spain a score equivalent to a rating of 'AA-' on the Long-Term Foreign Currency IDR scale. In accordance with its rating criteria, Fitch's sovereign rating committee decided to adjust the rating indicated by the SRM by more than the usual maximum range of +/-3 notches because in our view conditions justified a 4-notch adjustment to reflect the following:- - Public Finances: -1 notch, to reflect public debt at 99% of GDP; the SRM is estimated on the basis of a linear approach to GGGD/GDP and does not fully capture the increased risks at such a high level of debt. - External Finances: -2 notches, to reflect: a) Spain's very high net external debt, which is not captured in the SRM; and b) the +2-notch SRM enhancement for "reserve currency status" has been adjusted to +1-notch given Spain's financial crisis experience. - Structural Features: -1 notch, to reflect downside political risks of a disorderly resolution of the Catalan government's call for independence. Fitch's SRM is the agency's proprietary multiple regression rating model that employs 18 variables based on three-year centred averages, including one year of forecasts, to produce a score equivalent to a Long-Term Foreign-Currency IDR. Fitch's QO is a forward-looking qualitative framework designed to allow for adjustment to the SRM output to assign the final rating, reflecting factors within our criteria that are not fully quantifiable or not fully reflected in the SRM. RATING SENSITIVITIES The following factors may, individually or collectively, result in positive rating action: - Lower risk of disorderly resolution of tensions between the central and Catalan regional governments. - Further progress in reducing the budget deficit at the general government level, leading to a firm downward trend in public debt to GDP. - Improvement in Spain's external balance sheet. - Increased confidence of stronger long-run growth potential without creating macroeconomic imbalances, particularly if supported by structural reforms. As the Outlook is Positive, Fitch does not anticipate developments with a high likelihood of triggering a downgrade. However, the following factors, individually or collectively, could result in negative rating action: - An increase in general government debt to GDP, for example from loosening of Spain's fiscal policy stance, crystallisation of sizeable contingent liabilities or weaker GDP growth. - Heightened tensions between Catalonia regional and central government. - Emergence of a current account deficit, further weakening the net external position. KEY ASSUMPTIONS - Fitch's long-term debt sustainability analysis assumes a primary fiscal surplus that averages 0.3% of GDP from 2017-2026, GDP growth that averages 1.7%, and a steady increase in marginal interest rates. - There is broad political stability, and Catalonia remains part of Spain. The Catalonia regional government's planned referendum on independence does not result in disorderly events that significantly disrupt economic activity. Contact: Primary Analyst Douglas Winslow Director +44 20 3530 1721 Fitch Rating Limited 30 North Colonnade London E14 5GN Secondary Analyst Michele Napolitano Senior Director +44 20 3530 1822 Committee Chairperson Tony Stringer Managing Director +44 20 3530 1219 Media Relations: Peter Fitzpatrick, London, Tel: +44 20 3530 1103, Email: peter.fitzpatrick@fitchratings.com. Additional information is available on www.fitchratings.com Applicable Criteria Country Ceilings (pub. 16 Aug 2016) here Sovereign Rating Criteria (pub. 18 Jul 2016) here Related Research Spain - Rating Action Report here Additional Disclosures Dodd-Frank Rating Information Disclosure Form here Solicitation Status here Endorsement Policy here ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: here. 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