Market Overview

Trouble In Turkey As Fitch Cuts Junk Rating

Trouble In Turkey As Fitch Cuts Junk Rating

Down more than 36 percent year-to-date, the iShares MSCI Turkey ETF (NASDAQ: TUR) is one of the worst-performing single-country emerging markets exchange traded funds in 2018. 

The situation is unlikely to improve in the near-term for the lone U.S.-listed ETF dedicated to Turkish stocks after Fitch Ratings lowered Turkey's sovereign debt rating further into junk territory.

What Happened

Last week, Fitch lowered its rating on Turkey's sovereign debt from BB+ to BB with a negative outlook.

“Economic policy credibility has deteriorated in recent months and initial policy actions following elections in June have heightened uncertainty,” Fitch said in a statement.

Entering last Friday's U.S. trading session, TUR's 2018 loss was more than five times that of the MSCI Emerging Markets Index. Just 23 U.S.-listed ETFs have year-to-date losses of 30 percent, but TUR is the only one that is not an inverse, leveraged or volatility-related product.

Why It's Important

Fitch last lowered Turkey's credit rating earlier in 2017. The lower credit ratings increase the country's financing costs at a time when its current account deficit is expected to increase.

“Fitch believes downside risks to macroeconomic stability have intensified owing to the widening in the current account deficit, more challenging global external financing environment, jump in inflation and the impact of the plunge in the exchange rate on the private sector, which has significant foreign currency-denominated debt,” the ratings agency said. 

Recent elections in Turkey that bolstered President Tayyip Erdogan's power are leading to weakened economic credibility and policy, according to Fitch. 

What's Next

Turkey is facing a dual threat of a widening CAD and increasing inflation. Erdogan wants the central bank to lower interest rates, which may not be advisable with inflation rising.

“Headline inflation jumped to a 15-year high of 15.4 percent (up 2.6 percent month-over-month) in June, in the aftermath of the sharp depreciation of the lira (by 27 percent year-to-date),” said Fitch.

“Although we expect the cumulative 500-basis point hike in the policy interest rate by the central bank since April to ease inflationary pressure, Fitch forecast annual average inflation to be more than double the current 'BB' range median, at 13 percent in 2018 and 10.8 percent in 2019.”

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