Turkey’s adoption of anti-terrorism financing legislation last week reduces the risk of suspension from the Financial Action Task Force (FATF), which could have disrupted access to financial markets for Turkish entities including the sovereign, Fitch Ratings says.
Had it restricted market access, FATF suspension could have increased Turkey’s vulnerability to an external financing shock and reduced the benefits it has received from its strong fiscal financing options and debt-management capacity, and its well-established international capital market access. FATF had set a deadline of 22 February for Turkey to adopt legislation.
Turkey’s low savings rate means it needs to run current account deficits and secure external funding to finance investment and growth. The country has been able to roll over debt and attract net inflows despite volatile external conditions during the financial and eurozone sovereign debt crises.
Nevertheless, net short-term and portfolio debt forms the largest proportion of current account deficit financing, while the FDI share remains moderate. However, as we said when we upgraded Turkey to investment grade last year, we have grown more confident that Turkey could cope with a severe shock without suffering a full-blown financial or sovereign debt crisis.
“We upgraded Turkey to ‘BBB-‘ from ‘BB+’ in November, citing a combination of reduced, near-term macro-financial risks as the economy heads for a soft landing and underlying credit strengths including moderate government debt, a sound banking system and favourable growth prospects. One of our key assumptions was that FATF membership would not be suspended, or that if membership were suspended it did not result in countermeasures that prevented Turkish entities accessing international financing.”
The FATF, which sets international standards for combating money laundering and terrorist financing, had said it would suspend Turkey’s membership on 22 February unless the country adopted legislation “to adequately remedy deficiencies in its terrorist financing offence” and “to establish an adequate legal framework for identifying and freezing terrorist assets.” While there is no precedent for suspension, the FATF lists avoiding the risk of sanctions “or other action by the international community” as one of the benefits of implementing its recommendations.