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Turkey Credit Rating Outlook Cut by S&P on Worsening Trade

Turkey Outlook Cut by S&P on Worsening Trade
The Besiktas 1 passenger ferry travels along the Bosphorus, towards Besiktas Port, in Istanbul. Photographer: Kerem Uzel/Bloomberg

Standard & Poor’s cut its outlook for Turkey’s long-term foreign and local currency credit ratings to stable from positive, citing concern about external demand and terms of trade.

“Less-buoyant external demand and worsening terms of trade -- the price of exports compared to imports -- have, in our view, made economic rebalancing more difficult, and have increased the risks to Turkey’s creditworthiness given its high external debt and the state budget’s reliance on indirect tax revenues,” S&P said.

Turkey’s gross external financing needs will reach the equivalent of 142 percent of its current account receipts plus usable reserves this year, “one of the highest ratios for a rated sovereign,” S&P said. “This heavy reliance on external savings exposes Turkey to shocks,” it said.

Turkey’s central bank has sought to rein in loan growth it blames for fueling the largest current-account deficit among emerging markets by adjusting interest rates on a daily basis between 5.75 percent and 11.5 percent. Depreciation in the lira last year sent inflation to the highest level in three years at 10.5 percent.

‘No Lasting Impact’

The outlook cut “should have no lasting impact given that expectations on an upgrade by them was rather low in the market to start with,” Arko Sen, chief debt and currency strategist for emerging Europe, Middle East and Africa at Bank of America Corp. in London, said in an e-mailed comment.

The lira weakened after the statement, retreating as much as 0.3 percent to 1.7632 per dollar, before recovering to trade less than 0.1 percent stronger at 1.7558 as of 5:59 p.m. in Istanbul. Turkey’s bond and stock markets were closed today for a public holiday.

S&P affirmed Turkey’s long-term foreign currency sovereign credit ratings at BB, the second-highest non-investment grade.

Fitch Ratings cut Turkey’s long-term foreign currency outlook to stable from positive in November, citing the country’s current account deficit. Fitch rates Turkey at BB+, one step below investment grade. Turkey’s foreign-currency debt is rated Ba2 by Moody’s Investors Service, the equivalent level to S&P’s, with a positive outlook.

‘Unorthodox Policy’

The “problem is the international community just do not like the central bank’s unorthodox policy in context of wide current account and external financing needs,” Tim Ash, head of emerging markets at the Royal Bank of Scotland Group Plc in London, said in an e-mailed note.

Turkey’s dollar-denominated bond due in 2022 rose, cutting the yield 10 basis points to 4.894 percent.

“I am more positive than S&P,” Aurelija Augulyte, an emerging-market analyst at Nordea Markets in Copenhagen, said in e-mailed comments. “As long as the global markets are at least stable the Turkish economy will keep rebalancing gradually and the oil price decline in the short term will help.”

Crude oil for June delivery fell 9 cents to $104.78 a barrel today on the New York Mercantile Exchange, down from $109.77 on Feb. 24.

Turkey’s trade deficit declined to $7.35 billion in March from $9.8 billion a year earlier, the state statistics office in Ankara said on its website yesterday as exports rose 12 percent and imports fell 4.8 percent in the month.

Turkish exports decreased 2.9 percent in April from a year earlier to $11.4 billion, the nation’s Assembly of Exporters said in an e-mailed statement today.

The cost to protect against default on Turkish debt using credit-default swaps on Turkey fell five basis points to 227, according to CMA, which is owned by CME Group Inc. and compiles prices quoted by dealers in the privately-negotiated market.

The extra yield investors demand to hold Turkey’s dollar-denominated sovereign bonds rather than U.S. Treasuries dropped four basis points to 300, JPMorgan Chase & Co.’s EMBI Global index shows.

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