S&P Maintains Stable Outlook for Turkey Ratings

Sunday, 17 February, 2019 - 11:30
Ankara- Saeed Abdurazzak

Standard and Poor’s (S&P) maintained Turkey’s sovereign ratings at a stable outlook. In a report published later this week, the credit rating agency said that Turkey continues to hold its long-term foreign currency sovereign credit rating at B+.

It is worth noting that S&P downgraded Turkey’s rating last August following a sharp decline in the value of the Turkish lira. The currency lost nearly 30% against the dollar last year.

The agency predicted that the Turkish economy would shrink by 0.5% this year (2019) under current financial conditions and rising inflation, which exceeded 20%.

“We expect the Turkish economy to contract by 0.5% this year, although there are major uncertainties surrounding this forecast”, S&P said, adding that the ratings could be lowered if growth weakens beyond its projections.

“Even though financial market sentiment has improved and the lira has regained some ground since (August), we still expect the consequences will weigh on Turkey’s economic prospects in the near to medium term”.

Moody's and S&P last September shed light on the risks facing Turkey’s economy. Moody's said in November that “rescission pains” await the Turkish economy in 2019. Especially after the Turkish lira recorded its worst performance in 2018.

Turkey’s inflation is hovering near the fastest pace since President Recep Tayyip Erdogan came to power 15 years ago, and high-interest rates are clouding the investment outlook. Despite recouping some losses, the lira is still down 30% for the year against the dollar.

“Double-digit inflation, a steep increase in borrowing costs and curtailed bank lending are likely to weigh on household purchasing power, private consumption” and investment, Moody’s said.

The IMF also echoed Moody’s warning, predicting that Turkish economic growth will slip to 0.4% in 2019 from 3.5% in 2018.

“The weaker lira, higher borrowing costs, and elevated uncertainties weigh on investment and demand,” the fund said in a report.

Moody’s sees Turkey’s economy growing 1.5% in 2018 and contracting 2% the following year. It predicts Argentina’s GDP will shrink 2.5% this year and 1.5 % in 2019.

Turkey also has to contend with elevated inflation despite the worsening outlook for its economy.

Moody’s expects Turkish price growth, which accelerated to an annual 25.2% in October 2018, to remain in double digits through 2020 because of unanchored inflation expectations, spurred by pressure from the exchange rate and oil.

Economic growth slowed to 1.6% year-on-year in the third quarter last year, its worst performance in two years. Economists expect the economy to have contracted in 2018’s fourth quarter as well as in the first quarter of this year. S&P also said Turkey’s growth prospects could improve beyond 2019.

Last year’s currency crisis knocked companies’ financials and stoked concerns regarding the state of the banking sector.

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