Turkish markets, lira seeking recovery after Moody’s rating cut

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Turkey’s markets and currency were seeking recovery after shares tumbled 4 percent and bonds and the Turkish Lira weakened sharply on Sept. 26, the first trading day after Moody’s cut its credit rating to “junk,” raising risks of an outflow of foreign funds and a squeeze on external borrowing.

Moody’s cut Turkey’s long-term issuer and senior unsecured bond ratings by one notch to the speculative or “junk” level of Ba1 with a “stable” outlook late on Sept. 23, citing risks related to the country’s sizeable funding requirements and a slowing in its GDP growth and institutional strength.

The agency said it expected the deterioration in Turkey’s credit rating to continue over the next two to three years. Moody’s also said it saw Turkey’s real GDP growth averaging 2.7 percent between 2016 and 2019.

S&P Global Ratings had also downgraded Turkey in July following the failed coup attempt in the country, meaning that Fitch now remained the only major agency keeping Turkey above junk.

On Sept. 26, the main stock index was down 4 percent to 76,511 at early trading, on course for its biggest one-day decline since the days after the attempted coup of July 15. The losses were driven by banking shares, which fell over 5 percent.The main stock index closed the day with a 3.8 percent of decline to 76,725.

Borrowing costs surged with the 10-year benchmark yield rising to 10.01 percent from 9.51 percent on Sept. 23. Five-year Turkish credit default swaps (CDS) jumped by as much as 30 basis points to 276 bps from the Sept. 23 close of 246 bps before trading at around 268 bps, according to financial data provider Markit, as Reuters has reported.

The lira weakened to 2.988, after touching 3.004 in illiquid trade overnight, and was on track for its biggest one-day slide since July 19.

‘Little outflow so far’

So far, there has been little capital outflow and the possibility of it is remote, Deputy Prime Minister Numan Kurtulmuş said on Sept. 26.

“The assessment by Moody’s was completely political. The [Moody’s] note is full of political analyses. We have difficulty in understanding the agency’s decision, as its analyst made reverse comments just two days before the rating cut,” he also noted after a cabinet meeting in Ankara.

The shock to Turkey’s economy from the failed July 15 coup had largely dissipated, a managing director from Moody’s said on Sept. 21, adding it expected to conclude its rating review of the country within the next month.

“Turkey’s problems remain longer-term however,” Alastair Wilson, Moody’s managing director of Global Sovereign Risk, told Reuters, pointing to the country’s policymaking drives and the economy’s sensitivities to global interest rate shifts.

Deputy Prime Minister Mehmet Şimşek said that bond rates were lower than expected, underlining the country’s robust fundamentals.

“Despite the rating cut, we saw a strong demand for the Treasury’s tenders and the rates are lower than previously expected. Turkey’s macro basics are strong,” he tweeted on Sept. 26.

Turkey depends on investment to fund its current account deficit and service its foreign debt. Ratings downgrades could force it to pay more to borrow in international markets, according to analysts.

“Arguably, the downgrade could make it more difficult for Turkey to attract the foreign financing needed to fund its current account deficit, which could lead to a much weaker lira and slower GDP growth,” said William Jackson, an economist at Capital Economics, as quoted by Reuters.

“However, I think the ability to attract capital flows will have much more to do with external factors than Turkey’s credit rating,” he said, referring to U.S. interest rate decisions.

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