S&P Cuts Turkey Outlook to Negative on Lira Dive, Inflation

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S&P Global Ratings lowered the outlook on Turkey’s sovereign credit rating to negative, citing the lira’s recent weakening and rising inflation that the credit assessor says poses risks to the country’s “externally leveraged economy.” 

The lira has weakened 30% against the dollar since late October as the central bank cut interest rates amid inflation that S&P describes as “high and rising.” Current easing and significant depreciation will pressure inflation, which year-on-year may reach as much as 30% in early 2022, and will swell the deficit, according to the agency.  

The monetary authority intervened in the foreign-exchange market for the third time this month because of “unhealthy” price formations, echoing President Recep Tayyip Erdogan’s words to describe the recent turbulence. While the lira rebounded briefly, it slid back closer to 14 per dollar, near levels that sparked the three interventions. 

“We could lower the ratings if Turkey’s economic policy mix further undermined the exchange rate of the lira and worsened the inflation outlook, heightening the risk of banking system distress and thereby implying potential contingent liabilities for the government,” S&P said in a statement Friday.   

Moody’s Investors Service and Fitch Ratings also have assigned Turkey a negative outlook. S&P rates Turkey as B+, four notches below investment grade, and in line with Bolivia and Oman. 

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