S and P cuts Turkey debt outlook to negative

The Standard and Poor's agency on Friday downgraded Turkey's credit rating to "negative" from "stable" because of a slump of the lira while Fitch cut its sovereign debt to junk.

The national currency has dropped 18 percent against the dollar since Standard and Poor's latest review of Turkey in November, raising inflationary pressures, endangering corporate balance sheets and hurting economic growth, S and P said.

The agency's actual ratings for Turkey remained intact, but the outlook change indicates that any future move is now 

more likely to be downwards than upwards.

"We are revising our outlook to negative to reflect what we consider to be rising constraints on policy makers' ability to tame inflationary and currency pressures, which could weaken the financial strength of Turkey's companies and banks, undermining growth, and fiscal outcomes, during a period of rising global interest rates," it said in a statement.

The Turkish central bank on Tuesday hiked its headline interest rate by 75 basis points in a bid to boost the ailing lira but failed to impress markets looking for even sharper action.

S and P also said it saw limits to the ability of the central bank to stem the currency's decline.

"In our view, the Turkish central bank's monetary policy response to rising currency and inflationary pressures may prove insufficient to anchor its inflation targeting regime," it said.

The lira's recent performance has been the worst of any emerging markets currency, alarming the government ahead of a referendum expected in April on changing the constitution to give President Recep Tayyip Erdogan more power.

On the bright side, S and P acknowledged that the weaker lira could help some Turkish companies gain market share in key export destinations such as Russia, Iraq and Europe.

But this would only happen if any benefits from the weaker currency were not immediately eroded by higher inflation, it warned.

Fitch meanwhile said it had downgraded Turkey's long-term foreign currency issuer default rating to BB+ from BBB- and also cut ratings on the country's senior unsecured foreign currency bonds to BB+ from BBB-.

"Turkey's strained international liquidity position (at 76.1 the liquidity ratio is half the BBB median) make it vulnerable to shifts in investor sentiment," Fitch said in a statement.

"Indicators of external liquidity are generally little changed since Fitch upgraded Turkey to investment grade in 2012, but the stock of net external debt/GDP has continued to rise, to 30.4 percent at end-2016 from 22.7 percent at end-2012," the statement said.

"Evolving domestic and external conditions bring the potential for further tests of Turkey's ongoing resilience in external financing," it added.