A one to two-notch downgrade is implied for Turkey by the spread on its sovereign USD eurobond due 2028, Raiffeisen Bank International (RBI) said on June 12.

In a note to investors, RBI analyst Gintaras Shlizhyus said: “For Turkey the lira crisis cost dearly in terms of financial market stability with spreads for its sovereign USD eurobond due 2028 increasing from 380bp at the end of May to 408bp as of today. In this regard Turkey inches closer to levels indicating a serious stress persisting in this market, which is rated the average BB score (BB+/Ba2/BB- from Fitch/Moody’s/S&P respectively), albeit with a negative outlook from Moody’s.

“In our opinion the 400bp spread corresponds to the BB-/B+ rating bracket rather than to the current BB so it implies a one to two notches downgrade possibility.”

Turkey on June 11 posted stellar Q1 GDP growth of 7.4% but analysts said the period pre-dated the financial turmoil surrounding the collapsed Turkish lira (TRY). It simply demonstrated the country’s economy is overheating and that an abrupt slowdown can be expected in subsequent quarters. Data showing a worsening current account gap—driven by expensive energy imports and credit-fuelled consumer demand that has sucked in imports—and deteriorating inflation expectations confirmed Turkey’s economic malaise.

The market, added Shlizhyus in his commentary, “feels anxious about private sector debt and the lira devaluation pass-through for domestic prices”.

However, technically speaking, Turkey’s sovereign eurobonds stand cheap vs peers and on a rating per basis point basis warrant a Hold recommendation, Gintaras said.

The note also concluded that the situation on Turkey’s markets will gradually stabilise with the June 24 parliamentary and presidential elections outcome “fairly predictable with the ruling AKP and President [Recep Tayyip] Erdogan very likely winning. Although the consolidation of powers in the hands of the new president [under the constitutional changes the election will usher in] may be negative, we believe that the market already factored this into TR bond prices. Therefore we decided to leave a Hold recommendation on Turkey.