Moody’s cuts Turkey outlook to negative citing rising credit shock risk

By bne IntelliNews March 20, 2017

Moody’s Investors Service on March 17 lowered Turkey’s rating outlook to negative from stable, citing “the continuing erosion of the country’s institutional strength, its weaker growth outlook, heightened pressure on public and external accounts and the increased risk of a credit shock”.

Moody’s kept its issuer rating one notch below investment grade at 'Ba1'.

The lira was trading at 3.6273 per dollar as of 8am local time on March 20 versus 3.6365 on March 17.

Last September, Moody’s cut Turkey’s credit rating to junk. And in January this year, Fitch Ratings followed suit, stripping the country of its last remaining investment grade.

"The impact of ongoing political and geopolitical tensions on domestic confidence, and the heightened external pressures that led to a steep depreciation of the lira and high inflation, will suppress growth in the near term relative to expectations last year," Moody’s said in the statement.

Over the longer term, potential growth would remain relatively low by historical standards “in the continued absence of the structural economic reforms originally planned, such as in the labour market, to boost sagging productivity”, according to the rating agency.

The Turkish government forecasts that the economy will grow by 4.4% this year and that economic expansion will accelerate to 5% in 2018.

The rating agency also argued that “the actions taken to reduce various forms of opposition to the government since July last year have undermined the country's administrative capacity and damaged private sector confidence”.

More than 100,000 civil servants, including military officers, police officers, teachers, judges, prosecutors and employees at several key ministries have been sacked over alleged links to the coup plotters in the wake of the botched putsch of summer 2016.

Confidence in the Turkish economy, however, rose sharply in February, recovering from the near-seven-year index low registered in the previous month.

Moody’s also noted that “weaker growth is negatively impacting Turkey's key credit anchor - its healthy public finances and low government debt.” “The government has taken a range of measures to mitigate the domestic impact of the sluggish economy. Stopping such support will be difficult since the factors weighing on consumption and investment, such as higher inflation and interest rates and declining productivity, are structural rather than cyclical”.

Moody's expects the increase in government spending to continue into 2018, the fiscal deficit to widen and bond yields to continue to rise, with adverse implications for Turkey's debt metrics.

Upward rating pressure could materialise in the event of structural reductions in these vulnerabilities or material improvements in Turkey's institutional environment or competitiveness, according to the rating agency.

“Reductions in political risk emanating either from the geopolitical or domestic political environment, while credit positive, would not result in upward rating actions in the absence of sustainable improvements in external vulnerability although such developments could lead to a stabilisation of the rating outlook,” it added.

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