Turkey currency crisis in danger of resurfacing, Moody's says

Turkey may see a repeat of the currency crisis that ravaged its economy two years ago, Moody’s Investors Service said on Wednesday.

Inflation and external vulnerabilities remain high in Turkey, made worse by currency weakness, while the economy is expected to contract this year, Moody’s said in an annual report.

“The potential for renewed geopolitical tensions and prolonged stagflation are factors that could lead to a repeat of the 2018 currency crisis or more challenging conditions,” the ratings agency said.

Turkey is embroiled in military conflicts in Libya and has ratcheted up political tensions with neighbours Greece and Cyprus by exploring for hydrocarbons in the East Mediterranean. Meanwhile inflation has accelerated to 11.4 percent, significantly higher than the central bank’s benchmark interest rate of 8.25 percent, as the government sought to stimulate the economy with cheap lending from state-run banks.

Moody’s underscored the erosion in institutional and governance strength over the past three years along with increased political uncertainty, which it said led to a deterioration in the quality and transparency of economic policy.

Concerns among investors about policy direction and transparency have resulted in further depletion of the central bank’s foreign currency reserves this year, increased dollarisation of the economy and a weaker lira, Moody’s said.

The lira slumped to a record low of 7.269 per dollar in early May despite the central bank spending tens of billions of dollars of its foreign exchange reserves to help prop up the currency. The lira traded down less than 0.2 percent at 6.85 per dollar on Thursday.

Turkey’s junk ‘B1’ sovereign credit rating, which carries a negative outlook, would probably be downgraded should the authorities fail to pursue an effective policy framework that supports external funding needs, mitigates pressure on inflation and puts the country on a sustainable path of economic growth, Moody’s said.

A positive outlook for Turkey’s sovereign debt or a rating upgrade Is highly unlikely, Moody’s said. The outlook, however, could stabilise should fiscal and monetary policies become more coherent and a determined set of economic reforms implemented, it said.

In a separate report on emerging markets, Moody’s said Turkey’s banking system was “the major exception” when it came to dependence on foreign borrowing to fund operations. The industry has $48.5 billion of short-term wholesale funding coming due over the next 12 months, making banks vulnerable to constrained market access, it said.