Moody’s Investors Service has placed Turkey’s credit rating on review for downgrade saying it needs to assess the effects of the failed military coup.
Thus Moody's becomes the first of the three leading ratings agencies to consider a rating downgrade for Turkey, which it rates at Baa3. S&P said earlier this week it would assess the implications of the events in the coming days, while Fitch warned that the attempted coup and the authorities' reaction highlight political risks to the country's sovereign credit profile.
The review is driven by the need to assess the medium-term impact of the failed military coup on Turkey's economic growth, policymaking institutions and external buffers, given the existing challenges in all of these areas, Moody’s said in a statement on July 18.
The rating agency believes that despite the coup's failure, its occurrence is a reflection of broader political challenges, as associated credit risks remain elevated.
The review will assess the likelihood and implications of: 1) a sustained slowdown in domestic demand, leading in turn to lower economic growth for the next 2-3 years; 2) a further weakening of policy predictability and effectiveness, as well as a rise in policy inertia; and 3) reduced access to external liquidity, given the country's high external borrowing needs in the face of heightened domestic and international market volatility.
Moody’s is of the opinion that the most recent increase in domestic political uncertainty in Turkey, and most specifically the attempted coup, has the potential to significantly affect the country's growth trajectory negatively.
Turkey’s ratings could be downgraded if the review were to conclude that policy inertia was likely to lead to further delays in implementing the structural reforms needed to reduce external imbalances and sustain economic, fiscal and institutional strength; and/or that the probability has risen of investor risk aversion intensifying pressures on the country's external finances and heightening the risk of a sudden and sustained halt in foreign capital flows.
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