ISTANBUL: Turkish assets fell after Moody’s cut its sovereign rating outlook to negative, citing political turbulence, external financing pressure and weaker growth prospects.
The lira weakened to 2.1172 against the dollar by 1438 GMT from 2.0975 late on Thursday, while bond yields rose and equities fell.
Moody’s said one of the two drivers prompting the change in outlook was increased pressure on the country’s external financing position driven by “heightened political uncertainty and lower global liquidity.”
The Turkish economy’s Achilles’ Heel has long been its large current account deficit, which is running at around 7 percent of output. Turkey is sensitive to global liquidity conditions as it has relied on cheap foreign capital to finance the gap.
The gap narrowed to $3.19 billion in February from $4.93 billion a month earlier, slightly above a Reuters poll forecast for a deficit of $3.05 billion, data showed on Friday.
Given a slowing near-term outlook for economic growth and a more uncertain policy environment, prospects for growth-enhancing structural reforms might be diminished, Moody’s said.
A corruption scandal that became public in December has presented Prime Minister Tayyip Erdogan’s government with one of its biggest challenges during 12 years in power.
His AK Party won local elections on March 30, prompting a relief rally in markets that viewed the outcome as lowering political uncertainty, but more elections lie ahead, with a presidential race in August and parliamentary polls next year.
“Moody’s expects these tensions in the political arena to persist until at least the second quarter of 2015, when parliamentary elections are due,” the report said.
Erkin Isik, strategist at TEB, said a recent easing of liquidity conditions by the central bank and the subsequent fall in interbank rates had also left the lira vulnerable. Erdogan’s call last week for rate cuts has also raised concern about political interference in central bank policy.
He has been a critic of high borrowing costs, fearing they will hit growth as the country goes to the polls.
Central Bank Governor Erdem Basci hinted at rate cuts for the first time in a year, three days after Erdogan’s call.
“It’s worrying that Turkey’s central bank is suddenly striking a much more dovish tone after the elections, calling into question its independence,” said Nicholas Spiro, head of Spiro Sovereign Strategy.
Turkey’s two-year benchmark yield closed up at 9.94 percent from 9.83 percent on Thursday.
The Istanbul stock market closed down 0.57 percent at 72,736.33 points, in line with the emerging markets index , which fell 0.93 percent.