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Turkey’s sovereign credit rating was this week cut to “junk” by Moody’s Investors Service, which concluded a review that was initiated after an unsuccessful coup attempt on July 15.
Moody’s cited rising risks related to Turkey’s external financing needs and a weakening in its credit fundamentals as economic growth slows.
The rating was cut to Ba1 from Baa3, leaving Fitch Ratings as the only major ratings company to keep Turkey at investment grade.
“The risk of a sudden, disruptive reversal in foreign capital flows, a more rapid fall in reserves and, in a worst-case scenario, a balance of payments crisis has increased,” Moody’s said in an emailed statement announcing the decision late on Friday.
“This slow deterioration in Turkey’s credit profile will continue over the next two to three years and the balance of risks are better captured at a Ba1 rating level.”
With the rating cut, the difficulties Turkey faces in attracting the foreign capital needed to cover its current account deficit, the fourth largest in the
G20 group of major economies, are likely to be compounded.
The downgrade could drive forced selling of as much as $8.7 billion (R122 billion) in Turkish bonds, JPMorgan Chase said in August.
Many of the world’s biggest funds require investment-grade ratings from at least two of the three major ratings companies – Fitch, Moody’s and S&P Global – to consider an asset for investment.
The president’s view
The lira had weakened 0.9% to 2.9689 by the close of trading at midnight in Istanbul on Friday.
The currency has lost about 40% of its value against the dollar since 2013, when the Federal Reserve announced it was phasing out its extraordinary monetary stimulus programme, raising the prospect of reduced investment flows to emerging markets such as Turkey.
The Moody’s cut came a day after Turkish President Recep Tayyip Erdogan criticised ratings companies in an interview with Bloomberg in New York.
“I don’t care at all” if they downgrade, he said, accusing the ratings companies of making decisions based on politics rather than economic fundamentals.
“I’m inviting them to be honest,” he said.
“Whether you’re honest or not, Turkey’s economy is strong in any case, it’s standing upright and it will continue to stand upright.”
‘Shock’ risk
Moody’s placed the rating on review for downgrade three days after a faction of Turkey’s military tried to overthrow Erdogan on July 15.
The president blamed members of the Fethullah Gülen religious movement, and responded by declaring a three-month state of emergency that allows him to rule by decree.
Thousands were arrested, and tens of thousands of suspected Gülenist sympathisers have lost their jobs.
Writing on Twitter the morning after Moody’s concluded its review, Economic Minister Nihat Zeybekçi said the decision to cut Turkey’s rating “does not comply with macroeconomic fundamentals in any way”.
Deputy Prime Minister Mehmet Simsek tweeted that the best response to credit ratings agencies was to power on with structural reforms.
His colleague, Nurettin Canikli, said that Moody’s “either didn’t see or didn’t want to see” the improvements Turkey was making.
Credit markets were already treating Turkey’s debt as speculative. The cost to insure its five-year bonds against default was 248 basis points on Friday, more than double countries that were rated the same, including Slovenia and Romania, and about 40 basis points higher than junk-rated Russia.
“The risk of a shock arising as a result of the country’s weak external position has become more pronounced, given the combination of persistently high political risks and volatile investor sentiment,” Moody’s said.
It set the outlook as “stable”, citing Turkey’s “large and flexible economy, which continues to register positive growth and the government’s strong fiscal track record” – Bloomberg
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