The combination of a polarised electorate, a turbulent geopolitical backdrop, ongoing uncertainty in policy and large external financing requirements suggests that Turkey's vulnerability to shocks continues to weigh on the country's creditworthiness, Moody’s Investors Service said in a report published on April 19.

On March 17, Moody’s lowered Turkey’s rating outlook to negative from stable.

Earlier this week, fellow ratings agency Fitch argued that the April 16 referendum on introducing an executive presidency amounts to part of a political shift that has proved negative for the country's sovereign credit profile, although it might conceivably facilitate a revival of credit-positive economic reforms.

The government has pledged to carry out much-needed but long delayed structural reforms now that the referendum has passed.

“We have prepared the reforms, but we have not had the chance to implement them systematically, we will accelerate the reforms starting May. These will include an improvement of the investment environment, and tax and judicial reforms,” Deputy Prime Minister Mehmet Simsek said on April 10, just a week before the referendum on the constitutional changes set to make President Recep Tayyip Erdogan an executive-style president with sweeping powers.

However, Moody's thinks the authorities' willingness to enact long-delayed structural economic reforms “could be tempered by their desire to regain electoral support lost in the referendum before the 2019 presidential and parliamentary elections”.

“Given the slender margin of support for the [constitutional] changes, we expect that Turkish society will remain polarised over this issue, leaving the government preoccupied with both domestic politics and geopolitically driven security risks,” Moody’s added.

On April 19, the Supreme Election Board rejected appeals from opposition parties CHP and HDP for an annulment of the referendum which produced a contested result following reports of irregularities.

The tense political atmosphere stemming from the ongoing state of emergency, extended for another three months, will continue to impair business and consumer confidence, holding back investment and consumption and keeping growth low by historical standards, according to Moody’s.

Turkey’s economy grew by 3.5% y/y in the final quarter of 2016 after contracting 1.3% y/y in Q3.

Earlier this week, the IMF lowered its 2017 GDP growth estimate for Turkey to 2.5% from its previous expectation of 2.9%.

Moody’s expects that the Turkish government “will be reluctant to withdraw its fiscal stimulus, which is propping up growth, leading to modestly rising debt-to-GDP ratios over the next two years. Fiscal strength nonetheless remains a key credit anchor”.

Large external financing needs against comparatively low foreign exchange reserves means that the country’s vulnerability to shocks will continue to weigh on its creditworthiness, Moody’s concluded.