Defiant Erdogan says Turkey will not be cowed by the US
Rating agencies Moody’s and S&P Global cite volatility of lira and a possible recession in the country next year
Turkish President Recep Tayyip Erdogan yesterday declared that his country would not be bullied by the US.
The two Nato members are at odds over Turkey’s detention of an American pastor, which has started a trade row and plunged the Turkish lira into crisis.
“We will not surrender to those who present themselves as a strategic partner while at the same time trying to make us a strategic target,” Mr Erdogan said at a congress of his ruling Justice and Development Party.
“Some people threaten us with the economy, sanctions, foreign currency exchange rates, interest rates and inflation. We know your shenanigans, and we will defy you,” he said.
Last week, US President Donald Trump doubled the tariffs on aluminium and steel from Turkey, prompting Ankara to sharply raise tariffs on several US products.
On Friday, Turkey threatened to respond in kind if Washington imposed further sanctions, while a court rejected another appeal to free pastor Andrew Brunson, who has been held for almost two years on terrorism and espionage charges.
The lira has nosedived against the dollar, dropping as much as 20 per cent in one day last week. It sunk to a low of more than seven to the dollar last week but was trading at just more than six to the dollar on Friday, for a loss of 40 per cent since the start of the year.
The collapse of the currency has been blamed on the tension with the US, Mr Erdogan’s hold on Turkey’s economy and his refusal to let the central bank raise interest rates.
He told his party congress that the country would press on with and expand its cross-border military operations.
Turkey sent troops into northern Syria two years ago to fight against the Kurdish People’s Protection Units (YPG). The YPG forms most of the Syrian Democratic Forces, the Kurdish-Arab alliance that has received extensive backing from the US-led coalition in the battle against ISIS.
But Turkey accuses the YPG of being the Syrian branch of the Kurdistan Workers’ Party (PKK), a rebel group blacklisted by Ankara and its western allies. The Turkish army has also increased its strikes against PKK bases in the north of Iraq in recent months.
Turkey had its sovereign credit rating downgraded by Moody’s Investors Service and S&P Global Ratings, as the country sinks further into an economic crisis with little clarity from its leadership on how it plans to steer out of a turmoil that could onset a recession next year.
Moody’s downgraded the government of Turkey’s longterm issuer ratings to Ba3 from Ba2 and changed the rating outlook to negative yesterday. The country’s senior unsecured bond ratings and senior unsecured shelf ratings were also cut to Ba3 and (P) Ba3, respectively.
S&P slashed Turkey’s sovereign credit rating to B+ from BB- but assigned a stable outlook on Friday.
The rating agency, citing extreme volatility of the Turkish lira among the reasons for the downgrade, said the depreciation of the currency may lead to a balance of payments crisis that could undermine the economy and lead the country into a recession in 2019.
“The key driver for [the] downgrade is the continuing weakening of Turkey’s public institutions and the related reduction in the predictability of Turkish policymaking,” Moody’s said.
“That weakening is exemplified by heightened concerns over the independence of the central bank, and the lack of a clear and credible plan to address the underlying causes of the recent financial distress.”
Turkey’s lira has lost more than 40 per cent of its value against the US dollar this year, prompting fears of a sell-off in emerging markets.
“This follows Turkey’s prolonged economic overheating, external leveraging and policy drift,” S&P said.
“We now expect the economy will contract by 0.5 per cent in real terms in 2019, underpinned by declining consumption and falling investment.”
Turkey’s currency took a 20 per cent hit on Friday after US President Donald Trump announced a doubling of steel and aluminium tariffs on its Nato ally, in retaliation to the continued detention of American pastor Andrew Brunson in Turkey. He has been held since 2016 on charges of plotting a coup attempt against Turkish president Recep Tayyip Erdogan.
The lira rallied last Wednesday after Turkey’s banking regulator took measures to shore up the currency.
However, Washington later threatened more economic sanctions unless Turkey frees Mr Brunson.
We expect the economy will contract by 0.5% in real terms in 2019, due to declining consumption and falling investment S&P GLOBAL
One of Turkey’s high criminal courts on Friday rejected Mr Brunson’s request to be released from house arrest and permitted to travel abroad, Turkey’s state news agency reported.
The lira weakened again to 5.86 against the dollar that day, from a previous close of 5.8150.
The ratings agencies said the persistently volatile lira and wide current account deficit risk undermining the Turkish economy.
Moody’s said the tighter financial conditions and weaker exchange rate, associated with high and rising external financing risks, are likely to fuel inflation further and undermine growth, and said the risk of a balance of payments adjustment continues to rise.
Moody’s in June placed Turkey’s credit rating on review following the downgrade in March to Ba2, two levels below investment grade.
Mathias Angonin, a sovereign analyst at Moody’s, told The National ahead of the rating action that the agency is likely to downgrade it “if we conclude that policy-making is unlikely to be able to prevent a further deterioration in Turkey’s external position”.
S&P on Friday said the weakening of the lira is putting pressure on the indebted corporate sector and has considerably increased the funding risk for Turkey’s banks.
The policy response from Turkish authorities so far has been “limited”.
S&P already rates Turkey’s bonds as “junk”, meaning they are considered high-risk investments.
Moody’s on Saturday also lowered Turkey’s long-term country ceilings, including the foreign currency bond ceiling to Ba2 from Baa3, its foreign currency deposit ceiling to B1 from Ba3, and its local currency bond and deposit ceilings to Ba1 from Baa2.
Ceilings generally act as the maximum ratings that can be assigned to a domestic issuer in Turkey.
“The decision to narrow the gap between the ceilings and the government bond rating is informed by Moody’s view of weakening institutional strength,” it said.