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Another Week Of Woes For The Turkey ETF

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Another Week Of Woes For The Turkey ETF
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Compared to the prior week, last week wasn't all that bad for the iShares MSCI Turkey ETF (NYSE: TUR). The only U.S.-listed exchange traded fund dedicated to Turkish stocks lost 0.79 percent last week.

TUR is still down almost 23 percent month-to-date and more than 51 percent year-to-date. More bad news for Turkey arrived Friday after the close of U.S. markets when Standard & Poor's cut the country's credit rating deeper into junk territory.

What Happened

S&P lowered Turkey's long-term foreign currency sovereign credit rating to B+ and the long-term local currency rating to BB-. Last month, Fitch Ratings issued a BB sovereign rating for Turkey with a negative outlook. In early June, Moody's Investors Service had a Ba2 rating on Turkey, but that rating is under review.

On the S&P ratings scale, ratings of BB or B “are regarded as having significant speculative characteristics,” according to the ratings agency. “'BB' indicates the least degree of speculation and 'C' the highest. While such obligations will likely have some quality and protective characteristics, these may be outweighed by large uncertainties or major exposure to adverse conditions.”

"Over the last two weeks, the Turkish lira has exhibited extreme volatility," according to S&P. "This follows Turkey's prolonged economic overheating, external leveraging, and policy drift."

Why It's Important

Lower credit ratings mean Turkey will have to offer higher yields on any debt it issues to compensate investors for the perceived risk attached to those bonds. Those higher yields could also raise external financing costs at a time when Turkey is grappling with a soaring current account deficit.

“S&P projected that Turkey's economy will contract in 2019, and said the currency weakening has negative fiscal implications, including straining corporate balance sheets and putting more pressure on domestic banks,” reports CNBC.

Since the start of the third quarter, TUR has seen inflows of more than $196 million, but data suggest some of those inflows are tied to bearish traders borrowing shares of the ETF's underlying basket to establish short positions.

What's Next

Some global investors are apprehensive about Turkish assets based on policy responses many deem ineffective.

“Despite heightened economic risks, we believe the policy response from Turkey's monetary and fiscal authorities has so far been limited,” said S&P.

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