A man carries a bundle of metal rods past a large Turkish national flag hanging on a roadside in Istanbul, Turkey. (Photographer: Kostas Tsironis/Bloomberg)

Turkey Cut Deeper Into Junk as S&P Sees Recession Next Year

(Bloomberg) -- Turkey’s credit rating was cut further into junk Friday by S&P Global Ratings and Moody’s Investors Service, which said the volatile lira and wide current-account deficit may undermine the Middle East’s largest economy.

S&P reduced Turkey’s foreign-currency rating to four notches below investment grade at B+ from BB-, on par with Argentina, Greece and Fiji. Moody’s lowered its grade to Ba3 from Ba2, three notches below investment grade. The ratings companies said the weak currency, runaway inflation and current-account deficit are Turkey’s key vulnerabilities.

The lira slumped after the Trump administration sanctioned members of President Recep Tayyip Erdogan’s government amid an escalating dispute over a detained U.S. pastor that has roiled financial markets in Turkey and beyond. Erdogan portrayed the turmoil as an economic war waged by Washington and has resisted pressure to raise interest rates to protect the currency, a step that could curb economic growth.

“The weakening of the lira is putting pressure on the indebted corporate sector and has considerably increased the funding risk for Turkey’s banks,” S&P said in a statement. “Despite heightened economic risks, we believe the policy response from Turkey’s monetary and fiscal authorities has so far been limited.”

S&P last lowered Turkey’s credit rating by a notch in May, when it said there was a growing risk of a hard landing after the economy expanded by 7.4 percent. The downgrade by Moody’s followed a prior ratings cut in March. Above-trend growth typically expands the current-account deficit, which is expected to reach 6.4 percent of gross domestic product by the end of 2018. Most estimates for that gap predate the most recent run on the lira.

"We forecast a recession next year," S&P said. "Inflation will peak at 22 percent over the next four months, before subsiding to below 20 percent by mid-2019."

©2018 Bloomberg L.P.