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May 16 2019

Moody’s says Turkey faces possible downgrade on policy missteps

Moody’s said it may downgrade Turkey's sovereign credit rating should the government prove unable to implement effective economic policies.

Turkey should pursue measures that ease external financing needs, reduce inflationary pressures and bring sustainable economic growth, Moody’s said in a report published late on Wednesday.

“The rating outlook could stabilise if fiscal and monetary policies become more coherent and a determined set of economic reforms are implemented that address the economy’s structural imbalances,” Moody’s said.

The Turkish government has pledged to implement an economic programme to lift Turkey out of a deep recession and reduce inflation, which is running at almost 20 percent. But investors are concerned that the steps made so far, which include tax cuts and financial aid for crisis-hit companies, are merely stop-gap measures that threaten the country’s finances and fail to address weaknesses in the economy, including the banking sector.

Moody’s, which rates the country at junk ‘Ba3’ with a negative outlook, said eroding institutional strength and political tensions with the United States were also weakening Turkey’s credit profile.

“Together with turbulent politics, weaker institutions have led to a deterioration in the quality and transparency of macroeconomic policies,” Moody’s said.

Turkish Treasury and Finance Minister Berat Albayrak, the son-in-law of President Recep Tayyip Erdoğan, said at the weekend that Turkey is emerging speedily from an economic downturn thanks to the government's economic reforms.

The ratings agency also said a decision to re-run March 31 local elections for Istanbul, taken last week by the country’s election board under government pressure, raised uncertainty about policy responses should an economic recovery be slower than expected. Fresh elections will be held on June 23.

“The potential for renewed geopolitical tensions and additional policy missteps risk a repeat of last year's currency crisis and more challenging macroeconomic and financing conditions generally, prolonging the current stagflation,” Moody’s said.

“A positive outlook or an upgrade is highly unlikely,” it said.

Turkey’s lira slumped 28 percent against the dollar last year as concern among investors about an overheating economy intensified when Turkey and the United States became embroiled in a diplomatic crisis over the jailing of a U.S. pastor. The two countries are now at loggerheads over Turkey’s plans to purchase S-400 air defence missiles from Russia.

Turkey could see a positive impact on its rating should it apply for external financing support or diminish political tensions with the United States, Moody's said.

Investors say Turkey would emerge from an economic recession more speedily should it agree to a rescue programme from the International Monetary Fund. President Recep Tayyip Erdogan has ruled out that option to fund economic recovery and bolster investor confidence.

But the country’s finances are deteriorating. Turkey’s budget gap widened more than five-fold in April to 18.3 billion liras ($3.1 billion), taking the deficit so far this year to 68 percent of the government’s year-end goal. Spending climbed 13 percent while revenue shrank 11 percent, data published by the Treasury and Finance Ministry on Wednesday showed.

The government is considering using emergency funds at the central bank for the budget, according to media reports this week.