Turkey could be downgraded to high yield, AXA warns

AXA IM’s emerging markets economist Manolis Davradakis said Turkey may soon face a sovereign downgrade to non-investment grade in the aftermath of the failed coup that occurred on 15 July.

The country is currently plunged into a three-month state of emergency period, carrying risks for the country’s on both economic and political sides.

Davradakis believes Turkey is highly likely to be downgraded to high yield by the end of the year, as the high country risk premium would intensify the external financing risk of the country.

AXA IM has revised downwards Turkey’s GDP growth and upwards its inflation forecasts in 2016 to 2.6% (from 3.1%) and 10% (from 8.1%), respectively.

Davradakis points out that external financing tops the list of risks Turkey faces.

He refers to Standard and Poor’s figures indicating the country has to rollover around 42% of its total external debt, almost US$170bn “which is five times its usable reserves or 24% of estimated 2016 GDP” in the next 12 months.

Davradakis assesses a failure to rollover maturing debt would challenge the financing of the current account balance.

The economist recalls that the Turkish lira (TRY) has depreciated against the dollar by 20% on average during the previous four coups and that it has already depreciated by 10% YTD.

Also the EU/Turkey deal over refugees may be abolished following concerns over human rights violations during the country’s emergency state, Davradakis observes.

But the outcome of such a decision would eventually intensify the refugee crisis, which, this time, “may result in stronger xenophobic and Eurosceptic attitudes in the EU capitals, now that the Remain camp in the UK referendum won on concerns over migration.”

The full research is available here.

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