LONDON (Reuters) - Turkey’s finances could deteriorate rapidly if authorities fail to stem pressure on its currency and borrowing costs, credit rating agency S&P Global said on Tuesday.
S&P rates Turkey at BB-, already lower than rivals Moody’s and Fitch following a downgrade this month, but one of its most senior sovereign analysts, Frank Gill, told Reuters it could potentially act again if the market rout continued.
The lira touched a record low on Tuesday, having dropped around 18 percent this year on investor concerns over plans by President Tayyip Erdogan to tighten his grip on monetary policy.
Asked whether S&P would reconsider the ‘stable’ outlook it put on Turkey’s rating as part of the downgrade if there was no let-up in the pressure, Gill said “potentially”.
“The concern is that the balance of payments situation worsens and that really starts to hit growth and the fiscals pretty quickly, and the banks.”
He added that higher oil prices were not being passed on at petrol pumps, meaning that the government’s tax income was falling there too, while the large amounts of dollar loans given by the country’s banks were becoming more expensive to repay due to the lira’s slump.
Since September, when the combination of problematic politics and fast rising inflation began to unnerve investors, The currency has dropped almost 30 percent.
“A lot will ultimately depend on what the central bank does - if anything,” Gill said.
At the same time, he said Ankara had some “substantial buffers” and there is “absolutely a way out of this,” if authorities did take firm action.
“We think the government has some fiscal space but obviously if you do see a hard economic landing and demand really starts to weaken off from arguably overheated levels, that is going to affect the fiscal position pretty quickly.”
The comments came alongside another warning from Fitch on Tuesday, which rates Turkey two notches higher than S&P at BB+.
It said Erdogan’s “explicit threat to curb the central bank’s independence increases risks to the policymaking environment and to policy effectiveness.”
Erdogan is hoping to strengthen his grip on power in presidential and parliamentary elections on June 24.
Reporting by Marc Jones; Editing by Hugh Lawson and John Stonestreet