Markets do not expect Fitch to downgrade Turkey to junk

By bne IntelliNews August 18, 2016

Rating agency Fitch is not expected to reduce Turkey's credit rating to junk status when it releases its regular rating review, scheduled for August 19, a move that would have potentially hugely damaging implications for the country's financial stability. 

Market expectations are for the rating agency to affirm Turkey at the lowest investment grade or to delay the review or, in the worst-case scenario, to change the country’s rating outlook to negative from stable.

Concerns over political risks escalated after the July 15 failed coup attempt. However, the Turkish government seems to have proved its stability during the last month.

Data from the Turkish central bank showed on August 18 that there was an inflow of $186mn into the equity market last week, bringing down the total outflow since the July 15 coup attempt to $431mn. At the same time, the government debt securities markets saw an inflow of $478mn in the week ending August 12. The bond market saw a net inflow of $188mn in the last four weeks after the coup attempt.

The BIST-100 index is just 6% down as of early afternoon local time August 18 compared to its July 15 level, while the index was just down 0.1% compared to the end of last week. The Turkish lira lost only 1% of its value against the US dollar compared to the July 15 rate.

Moody’s and Fitch currently rate Turkey at the lowest investment grade while S&P has already downgraded Turkey on July 20 to junk level, lowering its foreign and local currency sovereign credit ratings to BB/B and BB+/B, respectively, from BB+/B and BBB-/A-3. S&P also raised on August 1 its risk assessment for Turkey to a "high risk" five from a "moderately high risk" four.

S&P and Erdogan regime have been at odds during recent years. Turkish President Recep Tayyip Erdogan has harshly criticized S&P many times and the Turkish government did not renew its agreement with the rating agency.

Despite S&P’s harsh approach, Mike Harris from Renaissance Capital told bneIntelliNews that he also does not expect Fitch to downgrade Turkey in parallel with Moody’s.

Moody’s on July 18 placed Turkey's credit rating on review for downgrade to assess the effects of the failed coup attempt. The rating agency said it would complete the review within 90 days of the July 18 announcement. Later in July, Turkish Finance Minister Naci Agbal held a meeting with Moody’s.

“I think the step S&P took was hasty, and I believe that the final evaluations by Moody's and Fitch will be positive. There is a great deal of harmony between the suggestions of Moody's and Fitch for the Turkish economy and our government's targets,” Agbal told Reuters.

On August 5, Moody’s said it stopped short of issuing a ratings statement for Turkey and its review of the country’s Baa3 rating remains ongoing.

Any downgrade of Turkey could trigger a significant amount of capital outflows  and hit its already struggling economy.

Ege Seckin from IHS told bneIntelliNews a downgrade would worsen Turkey’s ability to roll over its short-term debt, while reinforcing existing worries among international investors about the risk environment in the country. “This would potentially result in a reduction of exposure to Turkish assets, increasing downward pressure on the Turkish lira,”,says Seckin.

Atilla Yesilada, Turkey analyst at GlobalSource Partners, also does not expect a rating downgrade from Fitch. However, Yesilada thinks a downgrade by Fitch or Moody’s is 75% likely before the end of the year unless the government changes trajectory.

A rating downgrade would force passive bond funds to abandon the market, putting strains on the currency, which might have spill-over effects on other markets, Yesilada told bneIntelliNews. The downgrade would also increase banks’ borrowing costs, making it more difficult to engineer a credit-led consumer boom, according to Yesilada.

“It seems to me while AKP is handling the political transition from the coup to normalcy fairly well, its economic policies could bring about another calamity as soon as the risk appetite for EM tampers down globally”, Yesilada warns.

NON-RESIDENTS' HOLDINGS OF EQUITY AND GOVERNMENT DOMESTIC DEBT SECURITIES ($ mn)
(Market Value) 12/08/16 05/08/16 29/07/16 22/07/16 15/07/16 08/07/16 01/07/16 24/06/16 17/06/16
STOCK                  
         EQUITY  42,580.4 40,458.4 40,033.7 37,955.7 46,367.2 43,609.7 43,489.5 42,259.9 41,802.5
         GDDS  (*) 36,231.1 34,804.1 34,852.6 34,015.3 37,721.6 37,006.1 36,915.7 36,156.7 35,235.7
            Repo 3,575.7 3,486.5 3,543.4 3,463.3 3,769.8 3,953.9 3,942.6 4,112.5 4,018.1
         Private Sector 1,004.0 988.4 988.6 958.6 1,020.5 1,022.6 1,023.3 994.3 980.0
NET TRANSACTONS (Adjusted for Foreign Exchange and Market Price Effects)    
         EQUITY 186.2 -67.3 -328.5 -221.5 374.2 -24.1 -180.1 109.2 -188.8
         GDDS (*) 477.5 67.4 -117.2 -239.6 812.1 -104.7 470.6 65.9 -264.6
             Repo 1.5 -54.9 -1.6 5.7 -174.6 -2.6 -197.8 -0.2 -54.1
         Private Sector 15.6 -0.2 30.1 -61.9 -2.1 -0.6 29.0 14.3 -12.8
source: tcmb

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