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Turkish credit rating slashed by Moody’s as Turkey inches towards instability

By Patrick Higgins  |  08/03/2018 13:42

Prominent rating agency Moody’s has cut Turkey’s sovereign credit rating overnight, the latest economic hit in the last few turbulent years for Turkey.

The rating was cut from Ba1 to Ba2.

The most recent credit downgrade took place over a year ago in September 2016, during the societal crackdown and state of emergency that followed in the aftermath of the July 2016 coup attempt. The rating was lowered from Baa3 to Ba1, denoting a non-investment market.

Turkish intervention in Syria puts Turkey up against NATO allies

Domestic financial markets have largely ignored the downgrading, as Ba1 was already considered to be a non-investment grade, thus the difference between the two has been seen as minimal. There has been speculation that the latest downgrading reflects the state of US/EU-Turkey relations. Turkey has increasingly clashed with its NATO allies in the past few years, especially with the US. One need only reflect on the visa crisis earlier this year, when both Turkey and the US refused to issue visas for each other’s citizens, as well as Turkey’s condemnation for US support of Kurdish YPG rebels in Syria. Turkey considers the YPG to be a branch of the terrorist group PKK, which has waged a guerrilla war against Turkey since the 1980s. It was this perception of a Kurdish threat from the YPG against the Turkish border with Syria which prompted Turkey to launch an intervention into Syria earlier this year in the northern Syrian region of Afrin. Multiple clashes with YPG Kurdish fighters have only contributed to the worsening of Turkish-US relations.

Tightening control from President Erdogan

The deterioration of the economic outlook for Turkey can be attributed to the decline of independent institutions, unstable political and social climates, widening governmental account deficits, and dangerous external factors such as terrorist attacks from ISIS and spillover from the war in Syria. Political interference in the economic processes of the country has been highlighted as a particular concern for investors. President Erdogan, who has increasingly grown in authoritarianism since the failure of the July 2016 coup attempt against him and the April 2017 referendum that increased his power, has consistently called for Turkish banks to issue cheaper rates of credit in order to combat economic weaknesses. Erdogan himself has been critical of credit-rating agencies in recent years, accusing them of being Western puppets and prone to corruption.

A rapidly expanding economy, how much of it is a façade?

Reaction to the downgrade from Turkish national assets was minimal. The lira fell slightly against the dollar from 3.8035 to 3.8075, and 10-year bond yields rose to 12.28% from 12.20%. Despite maintaining a “stable” outlook and acknowledging the slight difference between Ba1 and Ba2, any downgrade in credit ratings for what is one of the world’s most rapidly expanding economies can only be negative. GDP grew by 11.1% in Q3 of 2017, making it the fastest growing economy amongst the G20. Total growth for 2017 is projected to hover around 7%. Such growth was propelled forward primarily due to increased governmental spending on stimulus programmes, again highlighting the increasing levels of government deficit. Relatedly, inflation continues to be stubbornly high, which has only been a detriment to the continued weakness of the lira against the euro and the dollar in the past few years. Regarding account deficits, Turkey relies on foreign direct investment to service both the discrepancies in government finances as well as foreign debt. If credit downgrades continue into the near future, Turkey's rate of borrowing could increase, and FDI could decline substantially. To highlight Turkey’s need for continued external investment into its domestic markets, Turkey’s governmental account deficits exploded last year by 42% from its deficit in 2016 to an unsustainable amount of $47.1 billion.



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