Turkey rating cut to junk by Fitch with stable outlook

Turkey’s sovereign debt rating was cut to junk by Fitch Ratings, which cited the toll of political developments on the nation’s economy. The lira briefly extended losses.Fitch cut its rating for Turkey to BB+ from BBB- on Friday, with a stable outlook, ranking the country’s debt on a par with Azerbaijan, Bahrain and Portugal. Moody’s Investors Service and S&P Global Ratings also have junk grades on the nation’s debt.“Political and security developments have undermined economic performance and institutional independence,” Fitch said in a statement. The government’s drive to introduce an executive presidential system, if successful, “would entrench a system in which checks and balances have been eroded, in Fitch’s opinion.”Political developments hurting the economy include purges against alleged members of a group blamed for last year’s failed military coup attempt with Fitch saying the crackdown has extended to other groups including members of media, unsettling economic actors. High-profile terrorist attacks damaged consumer confidence and tourism industry, it said.The downgrade adds to Turkey’s troubles as it tries to attract foreign capital at a time of fragile investor sentiment toward emerging economies. The country relies on short-term capital flows, foreign borrowing, tourism revenues as well as foreign direct investment to finance the gap in its current-account – which was probably over 4% of its gross-domestic product last year, according to estimates compiled by Bloomberg. The currency has lost around a quarter of its value against the dollar and more than $3bn worth of government debt were sold by foreign investors since Moody’s downgraded Turkey to junk last September. While most of the capital exodus may already have happened, there might still be “an initial knee-jerk reaction” to the loss of Fitch’s investment grade, Trieu Pham, a credit strategy analyst for emerging markets at MUFG Securities in London, wrote in e-mailed comments on Thursday.The lira extended its decline following the Fitch announcement but then trimmed its losses. It fell 0.5% to 3.87 per dollar on Friday.The currency’s drop is a sign of Turkey’s inability to fix external vulnerabilities of the economy and will likely have an adverse impact on the private sector, Fitch said. The agency “does not expect systemic problems that would jeopardise financial stability or trigger a balance of payments crisis.”The consumer inflation rate might increase to double digit figures in the first half of this year with “undue influence on the central bank” preventing policy making from hitting their inflation target of 5%.“The central bank has taken gradual steps to tighten policy over the last few weeks including raising rates on 24 January, but in Fitch’s view, policy is not sufficiently tight to hit the 2017 inflation target,” it said. “The policy simplification process appears to have been put on hold.”The loss of investment grade from all of the major credit companies will also likely increase the risk weightings on Turkish Eurobonds and foreign reserves held by commercial lenders and drive down capital adequacy ratios – a key benchmark for determining whether banks can withstand shocks. Friday’s downgrade could shave about 120 basis points off those ratios, according to Kutlug Doganay, a banking analyst at Is Investment & Securities in Istanbul.