S&P downgrades Turkey – TDS

Paul Fage, Senior Emerging Markets Strategist at TD Securities, notes that the S&P downgraded Turkey to BB from BB+ and the outlook was moved to negative from stable.

Key Quotes

• “According to S&P, the downgrade reflects the view that following the failed coup, Turkey’s political landscape has fragmented further and that this will undermine Turkey’s investment environment, growth, and capital inflows into its externally leveraged economy. The risks to Turkey’s ability to roll over its external debt have increased.
• Furthermore, Turkey’s policymakers will likely stray from their commitment to enact reforms intended to wean the economy away from its dependence on foreign financing.
• S&P’s move follows on from Moody’s announcement on Tuesday that it was placing Turkey’s Baa3 rating on watch negative.
• S&P seems to be more sensitive than the other agencies to political risks. Back in January they cut Poland’s rating from A- (positive) to BB+ (negative) on the back what we felt was a relative modest increase in political risks. So, unsurprisingly, a failed coup in Turkey followed by an authoritarian crack-down was enough for S&P to pull the trigger.
• USDTRY made new highs after S&P’s announcement, hitting 3.0893.
• Given that S&P already rated Turkey sub-investment grade, the actions of Fitch (BBB–, stable) and Moody’s (Baa3, watch negative) are potentially even more important and could lead to Turkey losing investment grade status.
• Given the political risks and the risks of further ratings downgrades, we maintain our negative stance on the lira.”