Turkey: Overheating concerns and rising country risk

5 min

Moody’s downgraded Turkey’s long-term sovereign rating last week further into junk territory, to Ba2 from Ba1, citing the continued weakening of economic and political institutions as well as increased risks from widening current account deficits and rising external debt. Moody’s also downgraded 14 banks and six large corporates. Data released this week showed that the current account deficit came in at –USD7.1bn (+163% y/y) in January, taking the 12-month rolling shortfall to –USD52bn (up from

–USD47bn in December and –USD34bn in January 2017). Only 15% of that were covered by net FDI inflows. The remainder was financed through short-term foreign capital inflows. As a result, short-term external debt on a remaining maturity basis rose to USD177bn at end-2017, up from USD160bn a year earlier. Financial markets have reacted markedly: since end-February, the TRY has weakened -2% against the USD and the 10-year TRY bond yield has risen +60bp to 12.2%. Concerns about economic overheating – real GDP rose by an estimated +7% in 2017 and core inflation hovers around 12% y/y – and rising country risk will remain on the agenda.