Turkey had its long-term foreign currency rating outlook cut to “stable” from “positive” at Fitch Ratings, which said near-term risks to economic stability rose after the current-account deficit widened to a record.
Fitch affirmed Turkey’s credit rating at BB+, one step below investment grade, and its short-term foreign currency rating at B. The lira dropped to a one-month low, the yield on the benchmark two-year bonds rose and stocks retreated for a fifth day.
The revision “reflects an increase in near-term risks to macroeconomic stability as Turkey faces the challenge of reducing its large current-account deficit and above-target inflation rate,” Ed Parker, an analyst at Fitch in London, said in an e-mailed statement today.
The current-account gap reached about 10 percent of economic output, or $78 billion, in the 12 months to September. The deficit will gradually improve and “the worst is behind us,” Turkish Deputy Prime Minister Ali Babacan told investors in a speech at Bloomberg offices in London today. The government is taking measures to reduce the structural deficit, he said.
The lira weakened 1.1 percent to 1.8717 per dollar at 5:58 p.m. in Istanbul, extending earlier losses to the lowest level since Oct. 4 on a closing basis. The yield on benchmark two-year bonds rose 11 basis points to 10.63 percent, the highest since July 2009. The main ISE National 100 (XU100) share index slid 1.7 percent to 51,091.51, with the index of banking shares (XBANK) dropping for an eighth day.
The rating outlook action means “expectations of an investment-grade rating will be killed at least for another 15 to 18 months, since Fitch was the only rating agency which rated Turkey just one notch below investment grade,” Ozgur Altug, chief economist at BGC Partners in Istanbul, said in an e-mailed report to clients.
Turkey’s foreign-currency debt is rated BB by S&P, two steps below investment grade, with a positive outlook, and an equivalent Ba2 by Moody’s Investors Service.
Fitch said it expected Turkey to end the year with 9.2 percent inflation and a current-account gap of 9.8 percent.
Turkey’s rating is supported by “stable government debt dynamics, a healthy potential growth rate and a strong banking sector,” according to the report. The country may be put back on “upward rating dynamics” if Turkey’s economy attains a “soft landing,” Fitch said.
The country may face negative rating action in the case of a balance-of-payments crisis or failure to secure disinflation, possibly triggered by “external shocks or domestic policy mistakes,” it said.
Concern the current-account deficit will worsen has helped push the lira down 18 percent this year, the biggest decline among emerging-market currencies after the South African rand.
Consumer price inflation accelerated to 7.7 percent in October from 6.2 percent, after prices jumped 3.3 percent in the month, the most for nine years. Inflation may end the year at 8.3 percent, exceeding a target of 5.5 percent, before easing at the start of 2012, according to central bank forecasts.
Turkey’s macroeconomic volatility is related to a low savings rate and an inability to “grow robustly without generating major imbalances,” Fitch said. The economy over- heated in the first half with surging bank credits fueling double-digit growth, rising inflation and a widening of the current-account deficit, it said.
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