Turkish municipalities face severe downturn, tight funding

Turkish municipalities are currently facing a challenging combination of a severe economic downturn and tight funding environment, Moody's Investors Service said in a new Special Comment.
Moody's expects municipal budgets to be impacted by the economic downturn that is hitting Turkey primarily on the revenue side, since a high proportion of their revenues comes from national shared taxes, including mainly value-added tax, corporate and personal income taxes. To date, growing revenues stemming from robust economic growth have helped Turkish municipalities to record buoyant operating performance and control their debt requirements. However, with the advent of the global crisis and the sharp deterioration of economic conditions in Turkey, tax collections are shrinking, directly impacting municipal budgets for 2009-10.
Overall, municipalities display limited shock absorption capacity in view of the very limited control on revenues and the socially-sensitive responsibilities. "In the near future, Turkish municipalities will be required to exercise fiscal discipline and to leverage their expenditure flexibility — primarily on the capital side of the budget — to manage budgetary pressures," explained Francesco Soldi, Assistant Vice President at Moody's and author of this report.
In addition, Turkish municipalities have been impacted by the recent credit market dislocation and are expected to continue facing tight liquidity conditions. "With the advent of the global crisis, risk aversion of investors has heightened and foreign capital flows have declined considerably, causing a widening of spreads, tighter lending conditions and shorter maturities on foreign-denominated borrowings. Such adverse conditions are unlikely to retrench this year," said Soldi. Whilst Moody's positively notes that the restricted access to foreign financing has been partially mitigated by increased accessibility to the domestic market, risk premiums requested by lenders are still high and overall funding conditions remain tight.
In this context and given the centralistic architecture of Turkey's local public sector, Moody's believes that the policy response of the central government will strongly influence the municipal sector's financial performance and stability.