Turkey’s lira weakened for a third day, while bonds and stocks fell, as Moody’s Investors Service lowered the nation’s credit-rating outlook to negative 11 months after upgrading the debt to investment grade.
Moody’s cut the outlook from stable, citing “increased pressure on the country’s external-financing position driven by heightened political uncertainty and lower global liquidity,” which hurt investor confidence. Turkey was raised to Baa3 by Moody’s in May 2013, the lowest investment grade and on par with India and Ireland.
The lira lost 0.3 percent to 2.1141 per dollar as of 6:14 p.m. in Istanbul. The currency has gained 3.7 percent since Prime Minister Recep Tayyip Erdogan’s party won a majority of seats at March 30 local elections. The Borsa Istanbul 100 Index dropped 0.6 percent, while two-year note yields rose 11 basis points to 9.94 percent.
Moody’s follows Standard & Poor’s, which reduced Turkey’s credit outlook to negative in February, citing the risk of a “hard economic landing” as foreign-currency reserves decline and policy makers spar over interest rates. S&P rates Turkey at its highest non-investment grade.
The change in outlook is a “warning that the political risks are not over after the local elections,” Ipek Ozkardeskaya, a currency strategist at Swissquote Bank SA in Geneva, said by e-mail. “We do not expect a credit-rating downgrade in the immediate future, yet the recent downside rally in Turkey rates should see some upside correction,” she said, predicting two-year yields will end the quarter at 10.75 percent.
A graft probe implicating the government that surfaced in December highlights “intensifying internal political divisions” that will persist until at least parliamentary elections in the second quarter of 2015, Moody’s said in a statement today accompanying the outlook decision.
The investigation and reductions in Federal Reserve monetary stimulus drove the lira to a record low in January, prompting the central bank to more than double its benchmark interest rate after an emergency meeting Jan. 28. The lira has risen 6.5 percent versus the dollar since then.
“Any downgrade may have some negative implications on capital inflows, but the broader picture is still positive for higher-yielding currencies, including Turkey,” said Nizam Idris, head of strategy for fixed-income and currencies at Macquarie Bank Ltd. in Singapore.
Turkey’s current-account deficit narrowed to $3.19 billion from $5.1 billion a year earlier, the central bank said on its website today, missing the $3 billion gap predicted in a Bloomberg survey of economists.
“The current-account deficit is narrowing as the currency effect slowly kicks in,” Baris Buyukdemir, general manager at Ceros Securities in Istanbul, said by phone today. “Moody’s was just an excuse for some profit taking in the market.”
Foreign capital inflows into Turkish debt totaled $1.3 billion in the week to April 4, the most since Oct. 25, according to central bank data published yesterday. The government earned its first investment grade in 18 years in November 2012 from Fitch Ratings.
“If Turkey falls below investment grade, there will be outflows, but I don’t think today’s decision will have a big effect on its own,” Yarkin Cebeci, an Istanbul-based economist at JPMorgan Chase & Co., said in e-mailed comments today. “When the outlook is cut, of course this probability rises. It’s not in our base scenario.”