Turkey Outlook Cut by S&P Citing ‘Hard Landing’ Risk

Turkey’s credit rating outlook was cut to negative from stable by Standard & Poor’s, which said there’s a growing risk of a “hard economic landing” as reserves decline and policy makers spar over interest rates.

The lira reversed gains after the announcement late yesterday, falling 0.4 percent to 2.2195 per dollar at 11:30 p.m. in Istanbul.

The move by S&P, the only one of the three main credit rating companies that doesn’t classify Turkish debt as investment grade, comes after the country’s central bank reversed policy and raised interest rates to halt a currency slump. The government has been calling for borrowing costs to be kept low, and says it has alternative plans to revive the economy and the lira.

“Turkey’s policy environment is becoming less predictable” and “this could weigh on the economy’s resilience and long-term growth potential,” S&P said in a statement explaining its decision. It cited “constraints on the independence and transparency” of Turkey’s central bank.

The bank raised its benchmark rate to 10 percent in the early hours of Jan. 29 after an emergency late-night meeting. It was convened to halt a slump in the lira that saw the currency drop more than 10 percent against the dollar. Prime Minister Recep Tayyip Erdogan said after the decision that while he’s always opposed higher borrowing costs, he’d give the measure time to succeed in reversing the market rout, before adopting an unspecified “plan B.”

Slower Growth

Turkey’s economy will probably grow an average of 2.2 percent this year and next, S&P said, cutting its forecast from 3.4 percent. It said the slowdown coupled with the lira’s decline will test the creditworthiness of Turkish companies, which have borrowed heavily in foreign currency.

The government considers S&P’s decision “unsound,” the official Anatolia news agency reported, citing unidentified senior economy officials who highlighted the recent tightening of monetary policy and expectations that the current-account deficit will narrow.

Turkey’s stocks, bonds and lira have fallen along with other emerging-market assets this year, as the U.S. Federal Reserve withdrew monetary stimulus. Turkey is the most vulnerable among those countries because of its high external financing needs and low foreign-currency reserves, Royal Bank of Scotland Group Plc said in a report yesterday.

Investment Grade

S&P kept Turkey’s rating at BB+, one level below investment grade. Fitch Ratings and Moody’s Investors Service promoted Turkey to investment grade in 2012 and 2013 respectively.

Bond markets often disregard rating and outlook changes. For example, France’s 10-year yield, which was 3.08 percent when S&P removed its top rating in January 2012, tumbled to a record low 1.66 percent last year. The rate was 2.24 percent at yesterday’s market close.

Similar moves on Turkey from the other ratings companies may follow, though Moody’s and Fitch would probably only cut Turkey back to junk “in response to a more serious deterioration in the external and domestic (economic and political) environment,” Goldman Sachs economists Ahmet Akarli and Kasper Lund-Jensen said in an e-mailed report yesterday.