TURKEY: Risk rating downgrading hits markets

28 January 1994

CONFIDENCE in foreign exchange markets was hit hard on 14 January by downgradings of the country's credit rating by the two US ratings agencies, Moody's Investors Services and Standard & Poor's (S&P). The downgradings have provoked a run on the lira which the treasury and central bank have tried unsuccessfully to contain with high interest rates.

Some observers fear the negative assessments may have triggered a foreign exchange crisis (MEED 17:12:93, page 5).

By 19 January, the dollar had gained 19 per cent over the previous week to an exchange rate of $1=TL 18,500. Some banks refused to engage in dollar sales. The central bank refrained from intervention, seeking to keep its reserves, which had already declined by 8 per cent to about $5,800 million in the week to 7 January.

The treasury and central bank have attempted to draw demand away from foreign exchange by raising interest rates on government paper. However, observers are uncertain whether an auction of nine-month bills on 19 January at yields predicted by treasury chief Osman Unsal of 95-96 per cent, coupled with an additional bond offering and central bank rises in its repurchase (repo) bond premiums, will soak up the excess liquidity chasing dollars, as he claims. What seems to be certain is that the situation is forcing the treasury temporarily to abandon its overall drive to lower interest rates.

Anxiety generated by the rate downgradings has been reflected in bearish sentiment dogging the Istanbul stock market, although a fall of 6.11 per cent in the index on 18 January was due to profit-taking on a steep rally since the start of 1994.

Moody's cut the country's rating to Ba1 from Baa3, or from investment to sub-investment grade. However, S&P kept its long-term foreign currency rating just within investment grade by lowering it to BBB- from BBB. In effect, Turkey has been ranked alongside countries such as Hungary, bankers say.

The downgradings had been expected - both US agencies had warned their ratings would be lowered if the government failed to bring about an improvement in the main economic indicators (MEED 22:10:1993). Negative assessments will make borrowing abroad more difficult for the government and private sector, analysts say. Japanese bankers say Turkey will pay higher spreads in Japan, a prediction echoed by their German counterparts.

Yet appetite for fresh Turkish risk was already limited in the medium and long-term, and creditor banks had built the probability of downgrading into their pricing - especially as it is very rare for Moody's to reconsider a downgrading once it puts a country on credit watch. Short-term deals are unlikely to be affected, bankers add.

By the end of 1993, annualised inflation had risen to 71.1 per cent, while its main engine, the budget deficit, continued to rise, and is expected to have reached TL 122 million million ($7,800 million). In the first 10 months, surging imports from a consumer boom had propelled the current account deficit to $4,800 million. 'Turkey is walking a tightrope,' says Helena Hessel, S&P's director of international finance.

The downgradings could impair the government's ability to raise funds from international bond centres, such as the Yankee bond market in the US, and from European centres such as Frankfurt and London. The first sterling bond issue was successfully launched in November. However, access to the Samurai bond market in Tokyo should be assured, following the announcement of a BBB rating by Japan Credit Rating Agency on 18 January. This will hold true even if S&P lowers its rating to sub-investment grade alongside Moody's, as is probable, say London-based Japanese bankers. This could lead to an even greater dependence on Japan as a source of funds in 1994 than in 1993; about half of about 10 bond issues were placed in Tokyo.

But much will depend on conditions in the Japanese market, which is spiralling downwards after a peak at the end of 1993, and which is hardly favourable to any new issue, Turkish or otherwise. In the first quarter, and probably the first half, Japanese market trends will be more important generally than individual country risk ratings for the success of any new issue. The same broadly applies to the bleak state of the Frankfurt market, according to German bankers.

The treasury plans in any event to lower its demands in 1994 on the international bond markets to $1,300 million compared with the $3,800 million raised from the Japanese, German and UK markets in 1993. However, it is also planning to tap the French and Spanish sectors for the first time.

Some comments by Moody's on the downgrade were less negative. It said the government was making significant attempts to increase revenues, to liberalise the economy, and to privatise state assets, but that spending was likely to remain high. Bankers and analysts add that the government could reduce its dependence on external borrowing by accelerating its privatisation programmes.

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