In double whammy for Turkey, Fitch cuts to junk after S&P slashes outlook

ISTANBUL (Reuters) – Ratings agency Fitch downgraded Turkey’s sovereign debt to “junk” on Friday, snuffing out its last remaining investment grade and underscoring deepening concern about politics and monetary policy in what was once a star emerging market.

The ratings cut, although widely expected by the market, came hours after rival agency Standard & Poor’s surprised investors by lowering its outlook for Turkey to “negative” from “stable.”

Both agencies sounded concern about political insecurity after a failed coup last year, as well as pressure on the central bank. More than 100,000 people have been sacked or suspended in the civil service and the private sector since the July 15 abortive putsch. Thousands more have been arrested.

“Political and security developments have undermined economic performance and institutional independence,” Fitch said in its statement. It lowered its rating to BB+ from BBB-, the latter being its lowest investment-grade rating.

Last year, S&P cut Turkey’s rating further into junk territory. Moody’s later followed suit and cut its own rating to junk, citing worries about the rule of law after the failed coup, and a slowing economy.

That left Fitch as the sole major agency providing an investment grade rating. Conservative investment funds usually require countries to have at least two investment-grade ratings for them to invest.

S&P on Friday cut its outlook for Turkey to “negative” from “stable,” citing growing constraints on policy-makers’ ability to contain inflation and shore up the tumbling lira currency.

“Talk about kicking someone when they are down, S&P changes BB outlook to negative. Rating already low, so this not expected,” economist Timothy Ash said on Twitter.

Costly downgrade

Turkey depends on investment flows to fund its current account deficit – one of the biggest in the G20 – and service its foreign debt. Ratings downgrades could force it to pay more to borrow money in international markets.

The lira has fallen some 8% so far this year, making it one of the worst-performing major emerging market currencies.

Economists have said a substantial rate increase is necessary to put a floor under the lira and contain inflation that is expected to hit double-digits in the first quarter.

The central bank raised rates last week, but not enough to stop the lira from weakening further. President Recep Tayyip Erdogan, who wants cheap credit to bolster the economy, has described himself as an “enemy” of interest rates, leading to concern the central bank is less than independent.

S&P, which has a “BB/B” rating for Turkey, also cited concern about domestic politics following the failed coup and Erdogan’s push for an executive presidency, which it said could limit parliamentary and judicial oversight of government decisions.

“We are revising our outlook to negative to reflect what we consider to be rising constraints on policy-makers’ ability to tame inflationary and currency pressures,” S&P said in its statement.