By Maria Armental 
 

S&P Global Ratings and Moody's Investors Service on Friday downgraded Turkey one notch further below investment grade, citing the recent extreme economic and financial volatility along with increasing tensions with the U.S.

The downgrades, and Moody's warning that a further cut could follow, come as the U.S. administration threatened new penalties against the country over its detention of an American pastor.

S&P downgraded Turkey to B-plus, from B-minus, with a stable outlook. Meanwhile, Moody's rated it slightly higher at Ba3, down from its earlier view of Ba2, and assigned a negative outlook, signaling that another downgrade could follow if the currency crisis deepened further.

Fitch Ratings--which last month downgraded Turkey to BB with a negative outlook--on Friday pointed to Turkey's "efforts to fill the initial policy vacuum" that helped stabilize the lira along with Qatar's pledge to invest $15 billion in Turkey.

However, it wrote, "Bilateral support such as that pledged by Qatar is unlikely to meet Turkey's external financing requirements without a sustainable policy adjustment."

S&P said it expects inflation to peak at 22% over the next four months and for the Turkish economy to enter a recession next year with gross domestic product, the value of goods and services produced, forecast to contract 0.5% in 2019. Still, the rating firm said, that would be a milder adjustment than the 6% output contraction in 2001 and 4.7% in 2009.

"We anticipate that 2019 will be the first year since 2009 in which nominal credit growth will be less than inflation, implying a major shift in real domestic financing conditions," the rating firm said.

Further, the rating firm said, investment--a traditional driver of the Turkish economy--is expected to shrink by 6% in real terms in 2019.

S&P said it also revised its view on the risk to the stability of the country's financial system given the sharp weakening of the lira.

The Turkish lira, the main barometer of investor sentiment towards Turkey, has lost more than one-third of its value against the U.S. dollar since the start of the year. The currency decline poses significant risk to banks' capital levels and asset quality, S&P said, and it could force the government to step in, by bailing out individual institutions or undertaking a broader sector clean up by moving bad loans to a "bad bank."

 

Write to Maria Armental at maria.armental@wsj.com

 

(END) Dow Jones Newswires

August 17, 2018 18:54 ET (22:54 GMT)

Copyright (c) 2018 Dow Jones & Company, Inc.
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