Sovereign rating further downgraded by Moody’s

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.

“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.

Moody’s also referred to “the increased risk of an external shock crystallising, 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. Among other agencies, Standard & Poor’s has a BB sovereign rating on Turkey, in line with Moody’s rating. In January last year Fitch downgraded Turkey to “junk” with a rating of BB+, one notch higher than Moody’s and S&P.

Turkey depends on investment flows to fund its current account deficit (one of the biggest in the G20) and service its foreign debt. Ratings downgrades could force it to pay more to borrow money in international markets.

Last year, the Turkish current account deficit widened 42 per cent to $47.1 billion, exceeding the government’s target.