Moody’s Warns Turkey Risks Financial Crisis

Currently, there is a huge risk of a financial crisis in Turkey. The rating agency Moody’s has further downgraded the country’s credit rating. The new credit rate was justified by the further weakening of institutions, the dwindling impact of monetary policy and the delays in structural reforms.

In a statement, Moody’s warned of the “increased danger of external shock” due to the high current account deficit and growing external debt in a time of increasing political risks and rising interest rates, news outlets reported.

Ratings agency Moody’s cut Turkey’s sovereign rating further into junk territory overnight, citing a continued weakening of its economic and political institutions and the increased risks from its wide current account deficit. The rating was downgraded by one notch to Ba2.

“The government appears still to be focused on short-term measures, to the detriment of effective monetary policy and of fundamental economic reform,” Moody’s said.

Set against a negative institutional backdrop, Turkey’s external position, debt and rollover needs had continued to deteriorate, it said.

The downgrade was largely shrugged off by Turkish financial markets.

Moody’s had already cut Turkey’s rating to a non-investment grade of Ba1 in September 2016 following an attempted coup, which undermined investor sentiment towards what was once seen as one of the world’s most promising emerging markets.

One banker described the downgrade as a “surprise development” that could put some pressure on Turkish markets during the day, although he said there was no real fundamental difference between a Ba1 and Ba2 rating, Andolu Agency said.

“I think this decision reflects the course of Turkey-US relations, as we are not in a different place in an economic sense from where we were a year ago,” said the banker, who declined to be identified.

There was limited reaction from Turkish assets. The lira fell slightly to 3.807 against the dollar from 3.803 at the close on Wednesday. The main Istanbul share index edged 0.13% higher. The 10-year benchmark bond yield rose to 12.28% from a close of 12.20.

“The mentioned risks are not new to the market and the focus is mostly on global risk sentiment rather than local developments,” said BNP Paribas/TEB strategist Erkin Isik.

Moody’s also referred to “the increased risk of an external shock crystallizing, given the country’s wide current account deficits, higher external debt and associated large rollover requirements in the context of heightened political risks”.

Turkey’s central bank on Wednesday kept interest rates steady and said it would keep policy tight faced with double-digit inflation.