ISTANBUL (Reuters) – Turkish shares tumbled 4 percent while bonds and the lira also weakened sharply on Sept. 26 after ratings agency Moody’s cut Turkey’s sovereign rating to “junk,” triggering fears of an outflow of foreign funds.
Turkey depends on investment flows to fund its current account deficit – one of the biggest in the G-20 – and service its foreign debt. Ratings downgrades could force it to pay more to borrow money in international markets.
The decline in shares put the main index on course for its biggest one-day decline since the days after a July 15 attempted coup.
Led by a 5.1 percent fall in the banking index, it was down 4 percent to 76,596 points early morning.
In its decision late Sept. 23, Moody’s cited worries about the rule of law after the failed putsch and risks from a slowing economy. GDP growth slowed to 3.1 percent in the second quarter from 4.7 in the first and was seen slowing further.
The cut will trigger an outflow of funds by investors, such as pension funds, who require at least two investment grades to buy sovereign debt, said Gökçe Çelik, chief economist at Finansbank.
“It will lead to repricing of (lira) denominated assets, pushing the cost of external borrowing higher while rendering the currency weaker,” Çelik wrote in a note to clients.
The 10-year benchmark bond yield rose to 10.01 percent from 9.51 percent on Friday and the lira weakened to 2.99 against the dollar from 2.9550 on Sept. 23 evening before Moody’s announced its decision. Overnight it touched a low of 3.0040 in illiquid trade.
Moody’s cut the government’s long-term issuer and senior unsecured bond ratings debt to non-investment grade Ba1 from Baa3. It kept its outlook on the rating “stable,” saying Turkey’s flexible $720 billion economy and strong fiscal track record offset the balance-of-payments pressures it faces.
“All told this was an inevitable decision in our view. Low rates of growth and a poor domestic political backdrop are hardly conducive to a benign investment climate,” Commerzbank said in a note to clients, forecasting weakness in the lira and cash bonds.
Prime Minister Binali Yıldırım said on Sept. 24 the downgrade showed Moody’s was not being impartial nor basing its rating solely on economic factors.
The ratings cut followed a two-notch cut by Standard and Poor’s right after the failed putsch on July 15. Of the three major agencies, only Fitch has Turkey on investment grade and it is due to review that rating at the start of 2017.