Apr 16 2018

Moody’s warns Turkey about lira

Moody’s Investors Service warned Turkey that recent weakness in the lira was negative for the country’s credit rating.

The ratings agency said the government’s determination to keep the economy growing rapidly ahead of elections next year, regardless of the costs, was creating a “tense situation”.

The country now faces “an important test of the delicate balance between Turkey’s fundamental strength from its dynamic economy and very strong fiscal metrices – and its high and rising exteneral vulnerability,” Moody’s said in an e-mailed statement to clients on Monday.

President Recep Tayyip Erdogan says Turkey will push ahead with its growth plans despite serious concern among investors that the economy is overheating.

The Moody’s statement followed a warning by Erdogan to foreign investors on Sunday that they would lose the right to be in Turkey should they “threaten us with exchange rates or other things”.

The lira slumped to a record low of 4.17 per dollar last week. It traded at 4.1 to the U.S. currency on Monday.

Turkey’s current account deficit has widened to almost 6 percent of economic output and inflation remains in double digits – about three times the emerging market average -- after Erdogan’s government stimulated the economy with a series of measures including almost $50 billion in loan guarantees and reductions in tax on some goods. He announced a further $34 billion in investment incentives for 23 projects last week.

Erdogan is rejecting calls to raise interest rates to slow the economy down, claiming that higher interest rates are inflationary, in contradiction with conventional economic thinking.