S&P downgrades Turkey's outlook

By bne IntelliNews May 2, 2012

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Standard & Poor's downgraded Turkey's long-term sovereign credit rating outlook on the country's foreign and local currency debt to 'stable' from 'positive' on May 1, as worries over the country's huge current account deficit persist.

S&P's rating for Turkey is two notches below investment grade. The outlook cut follows a similar move from Fitch in November for the same reasons. Turkey's sovereign debt has a 'BB+' rating at Fitch, which is one notch below investment grade.

"Less-buoyant external demand and worsening terms of trade - the price of exports compared to imports - have, in our view, made economic rebalancing more difficult, and have increased the risks to Turkey's creditworthiness given its high external debt and the state budget's reliance on indirect tax revenues," S&P said in a note.

The main risks to the Turkish economy will likely remain balanced over the next year, thanks to generally effective policy making and a moderate, declining public debt burden. The country's monetary policy is adaptable, the note also added. However, the country has severe external vulnerabilities and risks related to the 2010-11 credit boom, S&P worries.

S&P forecasts that Turkey's gross external financing needs in 2012 will be around 142% of current account receipts plus usable reserves - one of the highest ratios for a rated sovereign. Turkey is a country highly dependent on external savings and this makes it vulnerable to shocks.

Whilst analysts at Erste said the timing of the move was "surprising," since it came on a market holiday, the move is not entirely unexpected given the fact that Turkish exports are still struggling, provoking the country's already huge current account deficit worries.

Although government figures released on May 1 showed significant improvement in the March trade deficit, the Turkish Exporters Assembly reported a day later that exports fell 2.9% in April month on month. Turkey's economy is also highly dependent on European markets, where the economic crisis is spiraling once more.

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