“Our stable outlook for non-financial Turkish corporates is based on our expectation that rated corporates will benefit from moderate economic growth of 2.5 percent-3.5 percent in Turkey in 2012 as a result of their strong domestic focus,” says Martin Kohlhase, a vice president and senior analyst in Moody’s Corporate Finance Group and author of the report. “However, our outlook for Turkish corporates is cautious as a result of various risk factors that could affect their credit quality going forward, such as those related to financial market volatility, refinancing and expansion,” adds Kohlhase.

Moody’s recently lowered its GDP growth forecasts for most G-20 economies. This was to reflect the material slowdown in advanced economies as a result of financial market volatility, combined with ongoing deleveraging efforts in the public and banking sectors and persistently high unemployment. As an open economy, Turkey is vulnerable

to the potential spill-over effects of a drop-off in world trade and foreign direct investment that could result. Rising event risk may affect the performance of the Turkish economy.

Moody’s notes that Turkey’s trade and current account deficits have deteriorated due to higher domestic consumption and higher energy prices, as the country imports the vast majority of its energy requirements. As the deficit is financed by more volatile sources of capital, such as loans and foreign exchange deposits, Turkey is more prone to sudden

shifts in investor sentiment, which can create volatility.

Moody’s cautions that debt could become harder to repay and service if  the Turkish Lira continues to depreciate. The Turkish lira has depreciated by around 20% over the course of 2011 against its key trading currencies, the US dollar and the euro. Although this provides relief to exporters, it is a burden for corporates that have significant amounts of dollar-denominated debt as they face higher refinancing costs.

Headroom under certain financial covenants could also become constrained, heightening the funding challenge.

Turkish corporates are vulnerable to refinancing risk because they are heavily reliant for funding on short-term uncommitted lines from local banks. This is partially explained by the Turkish tax code, which penalizes debt denominated in foreign currencies. In addition, Moody’s notes that there is a risk that the European debt crisis could lead European banks, which are already pulling back from some emerging markets, to retrench from Turkey too, potentially limiting funding channels.

Expansion is a long-term credit positive, but comes with risks. Turkish corporates will continue to diversify their operations by expanding geographically, although ongoing unrest in parts of the Middle East could stymie some of these efforts. Large infrastructure investments envisioned by Turkey (e.g., toll roads, energy) could also present growth

opportunities. Moody’s views expansionary moves that reduce corporates’ reliance on the domestic market or a specific industry/asset as credit enhancing in the long term. However, expansion could also introduce greater complexity as corporates move beyond familiar jurisdictions and into new markets.