Moody's downgrades Turkey's sovereign rating, markets shrug

ISTANBUL (Reuters) - 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.

A general view of the city is seen from a rooftop in Istanbul, Turkey July 1, 2017. REUTERS/Umit Bektas

Ankara dismissed the decision, saying it was not credible.

Moody’s downgraded Turkey 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 in a statement.

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

The downgrade was shrugged off by financial markets and dismissed by Turkey’s government, which has vaunted a strong economic recovery after a brief dip following 2016’s failed coup. GDP surged 11 percent in the third quarter.

“Today the markets had zero reaction to the Moody’s report. The Turkish economy continues its growth path with a strong structure and high quality in public administration,” Finance Minister Naci Agbal was quoted by state-run Anadolu Agency as saying. “The decision has no reputability at all.”

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

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

“I think this decision reflects the course of Turkey-U.S. 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.

Relations between the NATO allies have soured over a range of issues, including U.S. support for a Syrian Kurdish militia that Ankara views as a terrorist group, and the conviction of a Turkish bank executive in a U.S. sanctions-busting case.

There was limited reaction to the Moody's downgrade from Turkish assets. The lira TRYTOM=D3 weakened to 3.8240 against the dollar by 1700 GMT from 3.8035 at the close on Wednesday. The main Istanbul share index .XU100 edged 0.24 percent lower.

The 10-year benchmark bond yield rose to 12.29 percent 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 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 given double-digit inflation. President Tayyip Erdogan has repeatedly called for cheaper credit to boost the economy, leading to investor concern about political pressure on policy.

Erdogan has lambasted ratings agencies’ decisions and accused Moody’s of making a political move with its previous downgrade in 2016. “Put a few cents in their pockets and get the rating you want, this is how they work,” he said at the time.

Moody’s said the erosion of Turkey’s executive institutions had continued with the widespread purge that followed the failed coup in July 2016. A state of emergency was subsequently imposed and remains in place.

More than 50,000 people have been jailed pending trial over alleged links to coup plotters, while 150,000 people have been sacked or suspended from jobs in the military, public and private sectors.

Moody’s lifted its outlook on Turkey to “stable” from the “negative” it assigned in March 2017.

Rival 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 on international markets.

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

Additional reporting by Behiye Selin Taner in Istanbul, Maria Sheahan in Berlin; Writing by Daren Butler and Ece Toksabay; Editing by David Dolan and Catherine Evans