SP says one-in-three chance of Turkey downgrade in next 12 months

Standard and Poor’s said on Friday there was a one-in-three chance it could downgrade Turkey’s sovereign rating in as little as six months, citing growing concerns about central bank independence.

SandP cut the lira’s local currency rating to quotBBB-/A-3quot from quotBBB/A-2quot. In what is likely to be a small relief for investors, it kept the more closely watched foreign currency sovereign rating untouched, but warned that could change.

quotOverall, we now consider that the challenged credibility of the central bank, including a weakened monetary transmission channel, has diminished the status of the Turkish lira as a reliable transactional currency,quot SandP said in a statement.

quotThere is at least a one-in-three likelihood that we could downgrade Turkey within the next 6-12 months if Turkey’s fiscal performance and debt metrics were to deviate from current expectations.quot

The lira has been hammered this year, hitting a series of record lows on concerns about political meddling in monetary policy. Facing flagging growth and parliamentary elections in June, President Tayyip Erdogan has fulminated against high interest rates, equating them to treason.

That has put pressure on the central bank, which has kept rates on hold even as economists say it needs to tighten to give the lira a much-needed boost. Instead, it has resorted to tweaking more obscure policy tools, moves that some critics say only reinforce perceptions of its declining independence.

External and monetary risk, including a considerable current account deficit, persist, SandP said. Inflation, which is likely to average 7 percent this year remains a problem, as does the tumbling lira, SandP said. quotWe could revise the outlook to stable if economic growth continued to rebalance and depended less heavily on external borrowing,quot it said.