S&P revises outlook on Turkey to negative from stable

Standard & Poor's on Thursday revised its outlook on Turkey's credit ratings to negative from stable due to what it said are rising risks the country faces in the political and global environment in the near term.
"The deteriorating macroeconomic environment threatens to aggravate Turkey's external vulnerability and skew the risks to its fiscal and economic prospects to the downside," S&P said in a statement. Since 2003, the cumulative net portfolio and debt inflow into Turkey has amounted to 17 percent of 2007 gross domestic product, almost 30 percent of which was invested in domestic debt and equity markets, S&P said.
"This massive cumulative inflow has subjected the relatively shallow Turkish domestic and foreign exchange markets to pronounced downswings when foreign investors withdraw their funds en masse in response to either changing global liquidity conditions, or a perceived increase in domestic risk," S&P said.
Such swings may have a detrimental effect on Turkey's credit-worthiness if they are prolonged, raising the government's financing costs and hurting the domestic economy.
"This is a very negative development on top of the March CPI (Consumer Price Index) that came in at 0.96 percent month-on-month versus consensus of 0.7 percent," said Simon Quijano-Evans, emerging markets economist at Unicredit in Vienna. The Turkish lira weakened after the revision and March's inflation data, which were higher than expected.
At mid-morning in New York, the lira stood at 1.3090 against the dollar in Friday-dated interbank trade, weakening from a close of 1.2815. Turkey's benchmark global bond due 2030 traded down 0.375 to bid 149.250 and to yield 7.316 percent.
So far this year Turkey's sovereign bonds have lost 1.36 percent, according to J.P. Morgan. The "BB-" long-term foreign currency and "BB" long-term local currency, among others, were affirmed.
The ratings on Turkey remain supported by the government's track record of sound economic and fiscal management, and the significant structural improvements these have yielded to Turkey's public finances since 2001.
But "the increasingly challenging political and global environment that Turkey faces in the near term raises the likelihood of a prolonged deterioration in Turkey's financing conditions," said Farouk Soussa, analyst at S&P.
The outlook will revert to stable if the government demonstrates that it can successfully manage challenges from the deterioration in the global economic environment and the political uncertainties it faces.