Turkish shares plunge due to political uncertainty, analysts warn worse to come

Traders walk on the floor of the Borsa Istanbul in Istanbul, Turkey © Murad Sezer
Stocks prices continue to fall on the Istanbul exchange, losing almost four percent on Thursday due to the state of emergency and market fears Turkey will lose its investment-grade credit rating.

The Borsa Istanbul 100 Index and BIST 30 were down 3.47 percent and 3.38 percent, respectively. The Turkish lira rebounded slightly from record lows, trading at 3.08 against the dollar. These are the worst results for Turkish markets since February. Shares in Turkish Airlines are at their lowest in 3.5 years.

On Wednesday, Standard & Poor’s cut Turkey’s credit rating one level to BB, two steps below investment grade, and assigned a negative outlook, pushing it further into speculative, or junk status.

In an address to the nation, Turkish President Recep Tayyip Erdogan criticized S&P of being politically motivated, adding that the downgrade of the country's ratings will not change the current situation in the economy, and investment will continue as usual.

According to JPMorgan, "S&P's action may increase market expectations of a downgrade to sub-investment grade by Moody's." Moody’s is currently weighing whether to downgrade Turkey.

Investor skepticism about Ankara has intensified after President Erdogan declared a three-month state of emergency in response to the failed military coup last weekend.

"The political moves point in the direction that things are likely to get worse rather than better from here on. So the lira is more likely to fall than to rise. This is about Turkish politics - I don't think there are other countries where politicians will take their cue from developments in Turkey,” William Jackson at Capital Economics told Reuters.

BNP Paribas is also bearish on the Turkish market. "Even after the sharp depreciation in the lira, we calculate real effective exchange rate index about seven percent above its lows reached in January 2014 and September 2015," the bank’s analysts said.