Turkish lira gains, shares rise despite Fitch's downgrade to junk status

By bne IntelliNews January 30, 2017

Turkey’s currency made gains and shares rose on January 30 as investors largely shrugged off Fitch Ratings' decision to strip the country of its investment grade status, a downgrade it issued just prior to the weekend.

The central bank’s ongoing tightening of liquidity also helped the lira as it strengthened 2.3% against the dollar to trade at 3.7945 as of 18:00 local time.

The main stock exchange index, the BIST-100, was up 2.88%.

President Recep Tayyip Erdogan’s advisor Bulent Gedikli dismissed Fitch’s decision as “political”, labelling the rating downgrade as “an intervention in Turkey’s internal affairs”. Turkey offers clear investment opportunities, Gedikli said on Twitter.

Morgan Stanley responded to the removal of the last investment grade status maintained on Turkey by a major rating agency by saying “the political outlook and security situation were more instrumental than the economic fundamentals in Fitch's downgrade decision”.

The investment bank pointed out in a note that it took an average 6.1 years for a country to regain its investment grade (IG) status after losing it. “Sovereigns upgraded to IG tend to have stronger economic growth and declining and/or below-average public debt/GDP levels. Given that Turkey is usually performing better than its peers in terms of growth and fiscal discipline, it may take a bit less than the average for Turkey to regain IG status,” Morgan Stanley said.

Morgan Stanley expected the most substantial direct impact of the downgrades by Moody's (September 2016) and Fitch to sub-IG would be felt via external deficit financing.

Future flows are likely to be a function of real/nominal yields, the monetary policy stance and currency expectations, the bank said.

It added: “As Fitch's downgrade decision was widely expected and real money funds seeking at least two investment grade ratings have mostly adjusted their positions in recent months, we do not expect a material impact from the Fitch downgrade on bond inflows to the BoP (balance of payments).”

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