The main Turkish stock exchange index, BIST-100, fell as much as 3.89% in early trading, led by a 5% drop in banking shares, and the local currency extended its losses on September 26 after Moody’s downgraded Turkey’s rating to junk status.
The lira weakened 1% against the greenback, trading at 2.9876 at 10:40am local time amid fears the downgrade may trigger a sell-off of Turkish assets and increase the country’s borrowing costs. Turkey is heavily dependent on foreign capital inflows to finance its large current account deficit.
There could be around $2-$3bn outflows from Turkish assets following the rating downgrade, President Recep Tayyip Erdogan’s adviser Yigit Bulut said on September 26 in an interview for state-run broadcaster TRT Haber. This is a more optimistic estimate than what J.P. Morgan had predicted earlier. The investment bank said in July that Turkey could see as much as $9-$10bn outflow from bonds in case of a rating downgrade. The yield on the 10-year bonds rose to 9.91% on September 26 from 9.51% on September 23.
“In our view, Turkey's fx bonds are fundamentally already pricing the lower rating and thus the market reaction in credit markets is likely to depend on the extent of forced selling by passive funds,” Goldman Sachs commented in an emailed note on September 26. “Given the weakening growth and in our view monetary policy being less effective at stabilising growth, we believe fiscal and quasi-fiscal policy will become more important in stabilising the economy at the expense of potentially worsening the credit fundamentals further”.
Bulut admits that Turkey’s borrowing costs will be higher but he is confident that the market turbulence will be short-lived and the lira will strengthen. The president’s adviser does not expect the central bank to intervene to prop up the value of the local currency.
The rating cut from Moody’s leaves Fitch Ratings as the only major ratings agency to keep Turkey at investment grade. S&P already downgraded Turkey's ratings into junk status in the wake of the failed July 15 coup attempt. A country usually needs at least two major ratings agency to rate it in investment grade for conservative investments funds to buy its bonds.
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