By Gökhan Kurtaran
London Letter, week beginning May 2

London Letter, week beginning May 2

- U.K. economy slows down ahead of the referendum

Last week, Britain’s economy slowed sharply in the first three months of 2016 as factors unrelated to the looming EU referendum put a brake on growth.

Growth slowed to 0.4 percent amid the flaring up of the Greek debt crisis. The economy lost momentum as construction and manufacturing output both shrank.

The Office for National Statistics (ONS) said there was no evidence for or against a “Brexit effect” on gross domestic product (GDP). It reported that output had expanded by 0.4 percent in the first quarter – down from 0.6 percent in the final three months of 2015.

On Tuesday, the U.K.’s manufacturing sector suffered a shock decline in April, contracting for the first time in more than three years. Markit registered 49.2, compared to 51 in March, falling far below expectations of an expansion of 51.2. It is the lowest level since March 2013. Any number below 50 indicates contraction. 

Uncertainty mounts ahead of the EU’s referendum on June 23 and is expected to put a downward pressure on the week’s financial data including Construction and Services Purchasing Managers' Indexes (PMI).

- What to watch ahead of the week in U.K.

On Wednesday, May 4, the U.K.’s Construction PMI Index report will be released. Growth in construction of new homes in Britain ebbed to its lowest level in three years in March, according to last month’s report of Markit/CIPS.

U.K. Construction Purchasing Managers' Index (PMI) held steady at 54.2 in March, matching February's 10-month low.

On Thursday, May 5 U.K. Services Purchasing Managers' Index will be released.  Britain's services sector had its worst quarter of growth in three years in the first quarter of 2016, according to last month’s report.  March's data showed that the services sector hit 53.7 last month, up from February's 52.7 reading, but lower than the 54 expected by economists. This contributed to the worst quarter for services since the start of 2013.

On Thursday, U.K. Prime Minister David Cameron is also expected to respond to MP questions at the select committee on the EU referendum.

Rating views on emerging markets and Turkey

Fitch Ratings says in a new report that the rapid rise in private-sector debt in emerging market (EM) countries, particularly those denominated in foreign currency, in conjunction with extensive depreciation of EM currencies, has increased downside risks to their economies, financial systems and sovereign creditworthiness at a time of heightened global uncertainty.

The report presents new estimates for non-financial private sector foreign currency debt in eight of the largest EMs: Brazil, China, India, Indonesia, Mexico, Russia, South Africa and Turkey.

Fitch estimates median foreign currency debt of the eight countries' private sector as 20 percent of GDP in 2Q15, out of a total (local and foreign currency) private sector debt of 90 percent of GDP. This implies foreign currency debt accounted for 22 percent of total debt. Foreign currency debt was highest as a share of GDP in Turkey, at 41 percent (including indexed debt), and Russia, at 37 percent. While China saw the lowest at 10 percent of GDP, India’s was at 17 percent. Turkey saw the highest as a share of total private debt in the country at at 46 percent, followed by Russia at 41 percent.

Fitch Ratings expects “Turkish banks to continue resilience to economic shocks as they still retain reasonable capitalization and liquidity,” Fitch Financial Institutions Director Lindsey Liddell said last week.

“However, challenges remain given the slower growth environment compared to historical levels, margin pressure from competition, and likely further asset quality pressures as loans season," Liddell said and added "particularly considering the sector’s high level of foreign currency lending and the sharp devaluation of the local currency in 2015.”

Another credit rating agency Moody’s which rates Turkey at “investment level” said in a teleconference last week on Turkish covered bonds that it forecasts slower growth, 3.4 percent in 2016 and 3.6 percent in 2017.

According to Moody’s “subdued economic growth puts additional pressure on banks and borrower’s creditworthiness.”

Standard & Poor’s is also expected to review Turkey’s credit rating and outlook on May 6.

03 May,2016