Turkey's lira revives as investors look past Fitch downgrade

ANKARA, Jan 30 (Reuters) - The Turkish lira firmed more than 1 percent on Monday, its biggest percentage advance in six sessions, as investors shrugged off a sovereign debt downgrade by Fitch amid central bank efforts to tighten liquidity.

Fitch’s downgrade on Friday snuffed out Turkey’s last remaining investment grade rating, underscoring deepening concern about politics and monetary policy in what was once a star emerging market.

The decision, although widely expected, came hours after rival agency Standard & Poor’s surprised investors by lowering its outlook to “negative” from “stable”.

“We expect the negative decoupling of the lira to stop unless there is a new, negative development to the contrary,” said one foreign exchange liquidity manager at a bank in Istanbul.

The lira firmed 1.4 percent against the dollar and was changing hands at 3.8120 at 1131 GMT. Earlier in the session it strengthened as far as 3.7995.

Turkey’s stock market also advanced, bucking a global trend. The benchmark BIST 100 rose 2.4 percent to 85,814 points.

Both Fitch and S&P sounded concern about political insecurity after a failed coup last year, as well as pressure on the central bank. More than 100,000 people have been sacked or suspended in the civil service and the private sector since the abortive July 15 putsch. Thousands more have been arrested.

Fitch also cautioned that a looming referendum on reforming the constitution and creating an executive presidency - which is expected in April - would “entrench a system in which checks and balances have been eroded”.

One of President Tayyip Erdogan’s advisers, Bulent Gedikli, on Twitter dismissed the Fitch downgrade as “political and not economic” and called it an “intervention in Turkey’s domestic affairs”.

Market participants also said the lira was underpinned by the central bank’s recent tightening. The bank this month hiked one of its interest rates by 75 basis points and another by 100, although it kept its benchmark rate on hold.

While the increases fell short of investor hopes for sharp rate rises, the bank has also managed to tighten liquidity by closing off some of its funding taps to the market, moves market participants have referred to as “covert tightening”.

On Monday, the central bank’s weighted average cost of funding spiked to 10.27 percent, its highest in almost three years.

“The central bank has made a covert rate hike of 200 basis points, and that’s not something to be overlooked,” said the foreign exchange liquidity manager. (Reporting by Nevzat Devranoglu and Ece Toksabay; Writing by David Dolan; Editing by Nick Tattersall and John Stonestreet)