Standard & Poor’s cut its outlook on Turkey’s ratings to negative from stable on Friday, saying that it saw risks of a hard economic landing and that the country’s policy environment was becoming less predictable.
A corruption investigation shaking Turkish Prime Minister Tayyip Erdogan’s government along with sharp falls in the lira currency and rising inflation have raised concerns about political and economic stability in the run-up to elections this year.
“Turkey appears to have suffered an unanticipated erosion of institutional checks and balances and governance standards,” Standard & Poor’s said in a statement, citing in particular concerns about the independence of Turkey’s central bank.
The credit ratings agency cut its outlook to negative on its unsolicited “BB+” long-term foreign currency and “BBB” long-term local currency ratings.
Nevertheless, it said Turkey’s low and largely lira-denominated debt provided it with significant buffers against economic turbulence.
The central bank ramped up interest rates last month to halt a slide in the lira despite opposition from Erdogan, a vocal opponent of higher borrowing costs who has railed against what he terms an “interest rate lobby” of speculators seeking to stifle growth and undermine the economy.
“We believe that any constraints on the independence and transparency of the central bank pose a risk to an economy that has traditionally relied on significant external financing needs,” Standard & Poor’s said.
Turkey is dependent on foreign capital flows to finance its gaping current account deficit, running at about 7 percent of national output.
Standard & Poor’s lowered its projection for Turkish GDP growth this year and next to 2.2 percent from 3.4 percent. It said the increasingly uncertain policy environment could weigh on the country’s economic resilience and long-term growth potential.
“Based on the fundamental story that has played out over the past few weeks the cut is justified. But I can’t help thinking that this is a backward-looking move,” Societe Generale emerging market strategist Benoit Anne said. “The central bank has been sending the right signal to the market that it takes financial stability risks quite seriously. Now we still need to get some kind of solution on the political front, but that is going to take a lot of time.”
Standard & Poor’s fellow ratings agencies Fitch and Moody’s have “BBB-” and “Baa3” ratings on Turkey respectively, both with stable outlooks.
Erdogan has overseen strong economic growth since coming to power in 2002, transforming Turkey’s reputation after a series of unstable coalition governments in the 1990s ran into repeated balance of payments problems and economic crises.
However, his increasingly authoritarian style, from a heavy-handed police crackdown on street protests last summer to his reaction to the corruption investigation in recent weeks — purging the police and judiciary — has unnerved investors.
Erdogan is committed to maintaining growth as Turks prepare to vote in local elections next month and a presidential race in August and has said his economic team is working on “a Plan B or a Plan C” for the economy.
Fitch and Moody’s said that last month’s huge interest rate hike of about 500 basis points could dampen economic growth, but left their ratings and outlooks unchanged.