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S&P pushes Turkey deeper into junk on risk of “hard landing”

“Even after the elections, we do not expect a return to more prudent macroeconomic policies”

In a surprise move, S&P Global Ratings on Tuesday pushed Turkey’s credit rating deeper into junk territory, citing concerns about high inflation as the lira weakens, a deteriorating current account and fiscal deficit.

S&P lowered the country’s foreign currency sovereign credit rating to BB-/B from BB/B — leaving it two notches below investment grade. The outlook on the rating is stable.

S&P said:

Our downgrade reflects our view that there is a risk of a hard landing for Turkey’s overheating, credit-fuelled economy. In our view, this is reflected in the rising imbalances in Turkey’s economy, most notably in its widening debt-financed current account deficit and high inflation. The ongoing weakness of the Turkish lira is not only fuelling inflation, but also amplifying risks related to Turkey’s high external debt.

Turkey last month lifted one of its main interest rates for the first time this year in an effort to staunch the lira’s losses. The lira is third worst performing emerging market currency, having shed more than 7.4 per cent against the US dollar this year. Inflation is currently running above 10 per cent, and S&P noted that the central bank has not met its 5 per cent inflation target since 2012.

Turkey’s president, Recep Tayyip Erdogan, last month called for early elections, bringing the nation’s parliamentary and presidential polls forward by more than a year.

S&P added:

Even after the elections, we do not expect a return to more prudent macroeconomic policies, as electoral considerations will continue to play a role in the run-up to local elections in March 2019.

The state of emergency will remain in place at least until the elections, de facto allowing the Turkish President to rule by decree. The prolonged state ofemergency and move toward the executive presidency underpins our concerns over centralised decision-making processes and an erosion of checks and balances.

S&P said the move was not part of its regularly scheduled updates. The next scheduled rating publication will occur in August.

Source: FT