* S&P says Turkey at risk of hard economic landing
* Says institutional checks and balances eroded
* Cuts growth forecast for 2014-2015
By Dasha Afanasieva
ISTANBUL, Feb 7 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 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 the 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 around 7 percent of
S&P lowered its projection for Turkish gross domestic
product 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
The lira was trading at 2.2170 against the dollar
by 1844 GMT, weakening from 2.2060 late on Thursday,
but still some way off its record low of 2.39 hit on Jan. 27.
"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," said Benoit Anne,
emerging market strategist at Societe Generale.
"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."
S&P's fellow ratings agencies Fitch and Moody's have BBB-
and Baa3 ratings on Turkey, respectively, both with stable
REPUTATION AT RISK
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.
But 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 in March 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.
But he has given no details, leaving investors guessing as
to what might be in the pipeline. His ministers have ruled out
capital controls to defend the lira.
Fitch and Moody's have both said that last month's huge
interest rate hike of around 500 basis points could dampen
economic growth but left their ratings and outlooks unchanged.
The central bank said it had tried to "front-load" its
monetary tightening with the hike but said it may tighten
liquidity further if needed.
Turks appear to be betting against it.
Foreign portfolio outflows have remained relatively steady
in recent weeks, suggesting much of the strong dollar demand is
coming from Turkish firms and households, stocking up on hard
currency as a potentially turbulent election period approaches.