Turkish lira slides to a new record low after Moody's downgrading

Turkey’s lira dived to a record low against the dollar on Tuesday after credit rating agency Moody’s downgraded Turkey’s debt rating to ‘B2’, citing higher external vulnerabilities and eroding fiscal buffers in the country.

The lira fell to as low as 7.4970 per dollar in afternoon trading in Istanbul, bringing its losses since the beginning of this year to about 21 percent. It recorded an unprecedented low against the euro at 8.9037, reaching a 25 percent decline since mid-2019.

Moody’s cited a possible balance of payments crisis and inability or unwillingness of the country’s institutions to effectively address such challenges.

“Turkey’s external vulnerabilities are increasingly likely to crystallise in a balance of payments crisis,” Moody’s analysts Sarah Carlson and Yves Lemay said. “As the risks to Turkey’s credit profile increase, the country’s institutions appear to be unwilling or unable to effectively address these challenges.”

The International Monetary Fund warned in early August that there appeared to be strong downward pressure on the lira, calling on the central bank to bolster its foreign exchange reserves in the medium term and to contain rapid credit growth.

The surge in lending, led by state-run banks, is hurting the lira because it is fuelling demand for imports among consumers and businesses, widening the country’s current account deficit. Turkey needs hard currency to finance that gap.