International ratings agency Moody’s downgraded Turkey’s sovereign rating further into junk territory last week citing the country’s weakening of its political institutions amongst others.
In its press statement, Moody’s outlined the rationale behind the downgrade which Turkey’s President has dismissed claiming conspiracy theories about external agents wanting to ‘corner Turkey’.
‘’The continued loss of institutional strength, as evidenced by further erosion in the effectiveness of monetary policy and further delays in implementing core structural economic reforms.
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 and rising global interest rates.
The rationale for assigning a stable outlook to the rating is that a Ba2 rating appropriately captures the further erosion of Turkey’s institutional strength and its increased susceptibility to event risks, balanced against the country’s economic and fiscal strengths, mainly its large and dynamic economy and favorable government debt metrics.
In a related decision, Moody’s lowered Turkey’s long-term country ceilings: the foreign currency bond ceiling to Baa3 from Baa2; its foreign currency bank deposit ceiling to Ba3 from Ba2 and its local currency country ceilings for bonds and bank deposits to Baa2 from Baa1. The short-term country ceilings remain unchanged at Prime-3 (P-3) for foreign currency bonds and Not Prime (NP) for foreign currency bank deposits.
The ongoing weakening of Turkey’s credit profile continues to be primarily driven, as it has over the past four years, by the deterioration in the country’s institutional strength. The government appears still to be focused on short-term measures, to the detriment of effective monetary policy and of fundamental economic reform.
The erosion of Turkey’s executive institutions has continued with the government’s ongoing activities to remove suspected sympathisers with the Gülen movement blamed for 2016’s coup attempt and the ongoing state of emergency. The undermining of the authority of the judiciary is illustrated by the government’s refusal to honor a Constitutional Court ruling to release certain political prisoners, and a lower court later sentenced the prisoners to life terms in prison. Deep divisions in Turkish society were evident in the campaign before the referendum on the constitutional amendments last April and the vote itself. Those amendments — which will eliminate the office of the prime minister and very significantly expand the authority of the president when they become effective next year, with limited checks and balances are likely to undermine the predictability and therefore the effectiveness of policymaking,’’ said Moody’s in their press statement.