Moments ago the Turkish LIra took another leg lower following what many had anticipated in the aftermath of this weekend's events: a downgrade by a rating agency, in this case S&P. which just cut the country to BB from BB+, outlook negative.
Republic of Turkey Foreign Currency Ratings Lowered To 'BB/B'; Outlook Negative
- Following the attempted coup in the Republic of Turkey on July 15, we believe the polarization of Turkey's political landscape has further eroded its institutional checks and balances.
- In addition, we expect a period of heightened unpredictability that could constrain capital inflows into Turkey's externally leveraged economy.
- As a result, we are lowering our foreign and local currency sovereign credit ratings on Turkey to 'BB/B' and 'BB+/B', respectively, from 'BB+/B'and 'BBB-/A-3'.
- The negative outlook reflects our view that Turkey's economic, fiscal, and debt metrics could deteriorate beyond what we expect, if political uncertainty contributed to further weakening in the investment environment, potentially intensifying balance-of-payment pressures.
On July 20, 2016, S&P Global Ratings lowered its unsolicited foreign currency long- and short-term sovereign credit ratings on the Republic of Turkey to 'BB/B' from 'BB+/B'. At the same time, we lowered our unsolicited local currency long- and short-term sovereign credit ratings on Turkey to 'BB+/B' from 'BBB-/A-3'. The outlook is negative.
We also revised the transfer and convertibility (T&C) assessment on Turkey to 'BBB-' from 'BBB'. In addition, we lowered our unsolicited long-term Turkey national scale rating to 'trAA+' from 'trAAA' and affirmed the 'trA-1' short-term rating.
As a "sovereign rating" (as defined in EU CRA Regulation 1060/2009 "EU CRA Regulation"), the ratings on the Republic of Turkey are subject to certain publication restrictions set out in Art 8a of the EU CRA Regulation, includingpublication in accordance with a pre-established calendar (see "Calendar Of 2016 EMEA Sovereign, Regional, And Local Government Rating Publication Dates,"published Dec. 22, 2015, on RatingsDirect). Under the EU CRA Regulation, deviations from the announced calendar are allowed only in limited circumstances and must be accompanied by a detailed explanation of the reasonsfor the deviation.
In this case, the reason for the deviation is our view that following the attempted coup on July 15, 2016, Turkey's institutional effectiveness has beenfurther eroded, raising risks to its externally leveraged economy. We believe these events will make rolling over Turkey's substantial short-term external debt more challenging.
The next rating publication on Turkey is scheduled for Nov. 4, 2016, accordingto our calendar.
The downgrade reflects our view that following the attempted coup on July 15, Turkey's political landscape has fragmented further. We believe this will undermine Turkey's investment environment, growth, and capital inflows into its externally leveraged economy. In the aftermath of the failed coup, we believe that the risks to Turkey's ability to roll over its external debt have increased. We estimate that it has to roll over nearly 42% of its total external debt--amounting to over US$170 billion (5x usable reserves; 24% of estimated 2016 GDP)--over the next 12 months. In addition, we expect that given the political uncertainty, Turkey's policymakers will likely stray from their commitment to enact reforms intended to wean the economy away from its dependence on foreign financing.
Since the attempted coup, we understand that, so far, an estimated 45,000, largely government officials, have either been suspended or removed from theirposts, with the education and judiciary sectors most affected. A further 14,000 police officers and soldiers have either been suspended or detained. Wehad already expected heightened political uncertainty in 2015--due to escalating domestic violence following the ending of the peace process with Kurdish militants, two general elections, and instability along Turkey's southeastern border--to spill over into 2016. However, the attempted coup and our expectation about the associated fallout on the real economy, through weakening capital inflows, is beyond what we factored into our previous base-case scenario. Turkey's net foreign exchange reserves--at an estimated $32 billion--provide coverage for only about two months of current account payments, suggesting limited buffers to offset external pressures.
Mitigating its external vulnerabilities to some degree, Turkey has deep local-currency capital markets that have facilitated its access to and cost offinancing. Two-thirds of government debt is funded in local currency and at fixed rates. Furthermore, we view the treasury's policy of meeting net public-sector financing needs by issuing in local currency at longer maturities as a positive rating factor.
The negative outlook reflects our view that Turkey's economic, fiscal, and debt metrics could deteriorate beyondwhat we expect, if political uncertainty contributed to further weakening in the investment environment, potentially intensifying balance-of-payment pressures. We could also lower the ratings if we assessed Turkey's monetary policy credibility as deteriorating due to government intervention.
We could revise our outlook on Turkey to stable if the government's fiscal deficits remained modest and the independence of key institutions was not eroded.