S&P says Turkey's financing the current account deficit gets riskier

The change in the balance of financing to corporate borrowing from foreign investment means a riskier position for Turkey and justifies the country's credit rating outlook to negative from stable, Standard & Poor's credit analyst Ben Faulks said.

Importantly, it is potentially leading to a riskier balance sheet profile for the Turkish corporate sector, as debt servicing becomes increasingly subject to swings in the exchange rate.

"Perhaps the greatest risk arising from Turkey's increased reliance on corporate borrowing is in terms of the stability of such financing," Faulks said. "Unlike FDI, for example, corporate borrowing is subject to rollover risk, and the extent to which foreign lenders will be able and willing to continue providing such finance given the global liquidity environment and rising political uncertainties remains to be seen."

Turkish corporations continue to step up their reliance on foreign borrowing, which rose sharply to reach a massive $28 billion in the 12 months leading up to April 2008.

"Since mid-2007, there has been a sharp drop in the extent to which foreign investors are financing Turkey's large current account deficit," Faulks said. "Although inflows into equity markets have remained fairly robust and FDI inflows have moderated only modestly since the beginning of 2007, flows into the domestic debt market have been dropping sharply since mid-2007."

The S&P's ratings service in April affirmed Turkey's long term foreign currency rating at BB-, three steps below investment grade. That is the same rating it gives to Serbia and Nigeria.

Fitch and Moody's also rate Turkey's long-term foreign currency debt at the same notch at BB- and Ba3 respectively.