Jun 15 2019

Moody's downgrades Turkey rating to B1, Turkey says decision is biased

Moody’s cut Turkey’s long-term issuer rating to B1 from Ba3 on Friday, a move The Turkish Ministry of Treasury and Finance said casted shadow over the neutrality and objectivity of the agency's ratings. 

The rating agency said in a written statement that the increasing risk of a balance of payments crisis and a government default was behind the latest move, which puts Turkey four notches below investment grade, on par with Jordan, Greece, and Uzbekistan, according to Bloomberg. Moody’s had previously cut Turkey’s rating to Ba3 from Ba2 in August last year.

According to Moody’s the risk of an acute balance of payments crisis in Turkey remains relatively low in the very near term, but this is an unstable equilibrium, and the more time passes the more the government's ability to steer the economy away from a balance of payments crisis is diminished. 

“This, in turn, increases the probability of more credit negative outcomes involving the need for capital controls, restrictions on access to foreign currency and (sanctions permitting) external support,” Moody’s said. 

Moody’s said there were a number of possible near-term drivers for further instability, including Istanbul mayoral election rerun on June 23, which the agency said created a risk of political unrest. 

Turkey’s election council annulled the March polls in Istanbul over election irregularities upon the appeal of the ruling Justice and Development Party (AKP), which lost the control of Turkey’s financial hub after 25 years on March 31.

The possibility of U.S. sanctions that can be imposed due to Ankara’s decision to purchase Russian S-400 missile systems is another risk, the agency said. “The imposition of sanctions on Turkey could also lead to a further, highly credit negative, market reaction. Moreover, depending on the sanctions imposed, it could also raise doubts over Turkey's ability to access an IMF programme, should one be needed in the future to avoid an escalation of a balance of payments and economic crisis,” it said.

Following the rate cut, the Ministry of Finance and Treasury said the downgrade was incompatible with the country’s economic indicators.

"Credit rating agency Moody's decision to downgrade Turkey's credit rating conflicts with the fundamental indicators of Turkish economy and casts shadow over the neutrality and objectivity of the agency's ratings," the ministry said on Twitter. 

Listing some economic indicators, the ministry said Moody’s rate cut ignored positive developments like including completion of recapitalisation of state lenders, the downward trend in inflation, and increase in tourism income.

It said the agency also "unfairly" criticised independence of institutions and free market in Turkey.