S&P cuts Turkey’s debt rating on deteriorating finances, inflation

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Ratings agency S&P said Tuesday it cut the rating on Turkey’s foreign debt due to deteriorating finances and rising inflation.

The grade on the country’s foreign currency debt dropped to speculative ‘BB-/B’ for long- and short-term issues respectively, but with a stable outlook, S&P said in a statement.

“Our downgrade reflects our view that there is a risk of a hard landing for Turkey’s overheating, credit-fueled economy,” the agency said.

The agency said imbalances, including worsening current account and fiscal deficits, as well as high inflation, were “building up,” while the share of short-term debt had increased.

In addition, the depreciation of the currency was “a risk to Turkey’s financial stability.”

“Signs of distress in the private sector are starting to show, and capital outflows and the lira’s depreciation may accelerate this trend,” S&P said.

Turkey’s economy is the fastest growing in the Group of Twenty but it is haunted by an uncertain long-term outlook, which will be key to the snap polls set for June 24 by President Recep Tayyip Erdogan.

Turkey recorded stellar growth of 7.4 percent in 2017 but the data have failed to douse fears over the underlying health of the economy which is marked by double-digit inflation, a wide current account deficit, a weak currency and high corporate debt.

Inflation is at 10.23 percent, double the central bank’s official target of five percent. The central bank last week raised its main interest rate more than expected to try to contain the pressures.

But S&P said, “We think these steps will be insufficient to reduce by much the gap between inflation (at 11.1 percent last year) and the central bank’s five percent medium-term target, or to reduce the volatility of Turkey’s real effective exchange rate.”

“The central bank, which has been facing increasing political pressure, has not met its inflation target since 2012.”

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