Turkey’s credit rating outlook was cut to negative from stable by Standard & Poor’s, which said there’s a growing risk of a “hard economic landing” as reserves decline and policy makers spar over interest rates.

The move by S&P, the only one of the three main credit rating companies that doesn’t classify Turkish debt as investment grade, comes after the country’s central bank reversed policy and raised interest rates to halt a currency slump. The government has been calling for borrowing costs to be kept low, and says it has alternative plans to revive the economy and the lira.

“Turkey’s policy environment is becoming less predictable” and “this could weigh on the economy’s resilience and long-term growth potential,” S&P said in a statement today explaining its decision. It cited “constraints on the independence and transparency” of Turkey’s central bank.

The bank raised its benchmark rate to 10 percent in the early hours of Jan. 29 after an emergency late-night meeting. It was convened to halt a slump in the lira that saw the currency drop more than 10 percent against the dollar. Prime Minister Recep Tayyip Erdogan said after the decision that while he’s always opposed higher borrowing costs, he’d give the measure time to succeed in reversing the market rout, before adopting an unspecified “plan B.”

S&P kept Turkey’s rating at BB+, one level below investment grade. Fitch Ratings and Moody’s Investors Service promoted Turkey to investment grade in 2012 and 2013 respectively.

Bond markets often disregard rating and outlook changes. For example, France’s 10-year yield, which was 3.08 percent when S&P removed its top rating in January 2012, tumbled to a record low 1.66 percent last year. The rate was 2.24 percent at today’s market close.

Source: Bloomberg (by Onur Ant)

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According to the National Bureau of Statistics, headline inflation in December inched up by 8.0% y/y. This marks a 0.1% rise from the 7.9% recorded in November and the second consecutive rise in inflation rate since October. In effect, inflation remained in single digits throughout 2013.

The consumer price index was demand-pushed in December given the festive season. Prices generally rose on the back of increases in eight of the eleven non-food divisions which contribute to the Core sub-index. Nevertheless, the upticks were offset by slower increases in “Alcoholic beverages, Tobacco, and Kola”, “Housing water, Electricity, Gas and Other Fuels” and “Transport” divisions. Consequently, the core index rose slightly by 7.9% in December, up from 7.8% in November marking the sixth sequential climb in the core index since July.

On the other hand, the Food sub-index grew by 9.3% in December, the same rate as it did in November. The rise in the Food sun-index was impacted by the rise in the price of Bread and Cereals, Meat, Fish and Dairy classes. Month on month, the index rose at a faster pace climbing by 0.78% in December relative to the 0.72% in November. This marks the highest month-on-month climb all through 2013.

 In summary, the percentage change in the average Composite Consumer Price Index for 2013 stood at 8.52%. This indicates a 3.72% contraction from 2012 levels of 12.24%. Despite the slight rise in the Headline Inflation in December which was expected due to the festive season, the CPI remained rather modest at 8% with a twelve month average of 8.52%.

Likely short term impact on the markets:

Fixed Income:

The bond market over the past week has seen sell-offs as traders reposition for a DMO auction this week. Post-auction, we anticipate yield contraction as system liquidity reduces over the month.

Equities:

We expect little reaction in the equities market. From a valuation perspective, the Nigerian equities market still appears attractive relative to other African markets although, the NSEASI is fairly priced at 14.60x price-earnings-ratio. This compares closely with 14.75x P/E for the Nairobi stock exchange and 20.40x P/E for the Johannesburg Stock Exchange (vs. 11.52x for emerging markets MSCI according to Bloomberg data).

Inflation Outlook:

The single digit inflation trend achieved all through 2013 reflects the strict monetary policy stance of the Central Bank over the year. We forecast about 150 basis points average jump by end of 2014. Inflation averaged 8.52% in 2013. Our forecast is driven by elevated fiscal spend ahead of the 2015 elections. Also due to statistical effect, a low 2013 base will impact inflation higher.

Source: Investment Management & Research

Investment One Financial Services Limited

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The naira advanced for a second day after investor inflows into a Nigerian bond auction pushed yields to a record low.

The currency of Africa’s biggest oil producer rose 0.2 percent to 157.5 a dollar at 11:14 a.m. in Lagos, the commercial capital. The naira has gained 3.1 percent this year, the second best performance of African currencies tracked by Bloomberg.

Nigeria’s 10-year borrowing costs declined to the lowest ever at the last auction this year yesterday. The 30 billion naira ($190 million) of bonds due January 2022 were sold at a marginal yield of 11.9001 percent, a record low at auction. The Central Bank of Nigeria sold $300 million yesterday at its last foreign-currency auction of the year, the most at a single sale since Aug. 8, according to data compiled by Bloomberg.

Foreign investor inflows into Nigeria’s bond market “are likely to remain consistent in the medium term,” Standard Bank Group Ltd. Africa strategists, led by London-based Stephen Bailey-Smith, wrote in a report today. “The dollar-naira interbank rate has continued to trade in a 156-158 range over the last few months. We expect this trend to persist for some time.”

JPMorgan Chase & Co. added the West African nation’s bonds to its benchmark emerging-market index series in October, predicting the inclusion may lure $1.5 billion to sub-Saharan Africa’s second-largest economy. Barclays Plc will follow from March 2013 for its own local-currency index, it said last month. Nigeria’s credit rating was raised one level on Nov. 7 to BB- by Standard & Poor’s.

Inflation Rate

The inflation rate of Africa’s biggest oil producer rose for the second month in November to 12.3 percent as the worst floods in decades cut farming output, the statistics bureau said Dec 17. The impact of the floods will probably boost inflation before price pressures begin easing early next year, Central Bank of Nigeria Governor Lamido Sanusi said on Nov. 20, after leaving the benchmark interest rate unchanged at 12 percent.

Yields on 10-year naira debt climbed one basis point to 11.89 percent in the secondary market, according to yesterday’s prices compiled on the Financial Markets Dealers Association website. Borrowing costs on the nation’s $500 million of Eurobonds due January 2021 declined two basis points to 4.11 percent.

Ghana’s cedi gained less than 0.1 percent to 1.896 per dollar in Accra, the capital.

Source: Bloomberg (written by Chris Kay)

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