Turkey’s Upgrade ‘Uncertain’ on Deficit, Fitch Says; Stocks, Lira Plunge

Turkey’s record current-account deficit and growth in bank lending are causing “uncertainty” for Fitch Ratings on its outlook for an upgrade.

“Given the scale and trend in the current-account deficit and bank credit growth, we think that there is still uncertainty over there and we need to wait and judge the evidence as it comes in,” Ed Parker, managing director at Fitch, said in a phone interview from London.

The comments sent Turkey’s benchmark ISE National 100 equity index tumbling as much as 3.6 percent, the most in more than four months in intraday trading, and the main industrials index to a drop of 5.7 percent, the biggest decline in more than a year. The equities gauges pared losses as European Union officials discussed a plan to recapitalize struggling banks, leaving the general index down 754.50, or 1.2 percent, at 60,882.33. The industrials index closed with a 2.2 percent retreat.

“We saw hard selling after the Fitch statement,” Isik Okte, a trader at Finans Invest in Istanbul, said in e-mailed comments. “Both foreign and local investors have no intention of staying in the Turkish equities market for the long term, so we had panic selling in a market that has no liquidity and no depth.”

Bonds reversed earlier losses and rallied on speculation EU leaders may widen the scope of their rescue plan for Greece, pushing Turkish benchmark yields down 15 basis points, or 0.15 percentage point, to 8.6 percent, according to a Royal Bank of Scotland Group Plc index of two-year debt. The lira weakened 0.4 percent to 1.6691 as of 8:24 p.m. in Istanbul.

‘Striking’

Bank of America Merrill Lynch and HSBC Holdings Plc said earlier this year they expected Turkey to reach investment grade by the end of 2011. Fitch places Turkey one level below investment grade, while Moody’s Investors Services and Standard & Poor’s rank the country two grades below investment status.

“For an agency that was before talking about an upgrade to now say that an upgrade is uncertain, is striking,” said Fatih Keresteci, a strategist at HSBC in Istanbul. “This kind of news is discouraging.”

Turkey’s 12-month current-account deficit climbed to $68.2 billion, or about 9 percent of GDP, in May. Loan growth at an annual 36 percent is spurring demand for imported goods and raw materials, and driving growth in the current-account gap. The International Monetary Fund forecasts the gap to reach 10.5 percent of gross domestic product this year.

Current Account

Growth in lending is 11 percentage points above the official year-end target of 25 percent, based on Banking Regulation & Supervision Agency figures on July 18.

“If we look at the pace of the GDP growth, the size of the current-account deficit and the recent pace of bank credit growth, then there are signs that the economy is growing above its potential and overheating,” Fitch’s Parker said.

Central Bank Governor Erdem Basci has held rates at record lows and increased banks’ reserve requirements to rein in credit growth. The pace of lending has slowed from 40 percent a year ago.

“It is an unorthodox policy and I think that the results so far are mixed at best,” Parker said in the interview late yesterday.

Tourism Revenue

Zafer Caglayan, Turkey’s minister for trade, criticized Fitch’s comments in a meeting with reporters in Ankara today.

“Aren’t these the same people who gave their highest rating to Ireland? I think the ratings agencies have lost their esteem and need to try to look to their own reliability,” he said. “With the effect of tourism revenues over the summer, we’re going to see an improvement in the current account in the fourth quarter. I don’t agree with Fitch’s assessment.”

The central bank kept interest rates unchanged at 6.25 percent today after inflation slowed in June to 6.2 percent from 7.2 percent in May.

There is no need to raise rates because limits imposed on bank lending are starting to reduce credit expansion, the central bank said in a July 5 paper posted on its website. The deficit is the biggest risk to Turkey’s financial stability, according to a central bank report in May.

Crisis Coming

Turks should save their money because “dark clouds are gathering over the global economy,” potentially leading to a global crisis that will hurt Turkey, said Bulent Gedikli, head of economic policy for Turkey’s ruling party, Radikal newspaper reported yesterday.

Shares of Dogan Sirketler Grubu Holding AS, the holding company with media and energy interests, fell as much as 12 percent, the most since Septemer 2009, before closing down 5.4 percent at 87 kurus. Dogan Yayin Holding AS, the country’s largest publisher, dropped 7.8 percent, the most since November 2009.

“Fitch’s discouraging comments are not welcomed by market participants” because the agency was seen as an early mover toward investment grade,” Ozgur Altug, chief economist at BGC Partners, said in a note to clients. Investors “put emphasis on Fitch, as the agency’s Turkey sovereign rating is just one notch below investment grade.”

Turkey is more vulnerable to fallout from the EU debt crisis compared with other developing nations, according to Parker at Fitch.

“Turkey having a large current-account deficit, a large external financing requirement and also the EU being its biggest trading partner, it would be more vulnerable than some other emerging markets,” he said. “An increase in global risk aversion and reduction in global liquidity would have a negative impact on Turkey.”

To contact the reporter on this story: Selcuk Gokoluk in Istanbul at sgokoluk@bloomberg.net; Benjamin Harvey in Istanbul at bharvey11@bloomberg.net

To contact the editor responsible for this story: Gavin Serkin at gserkin@bloomberg.net

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