Ratings agency Moody’s has downgraded Turkey’s sovereign ratings to Ba2 from Ba1, citing a continued loss of institutional strength and the increased risk of an external shock given its wide current account deficit.
The rating outlook has been changed to stable from negative.
The Turkish Lira fell slightly to 3.8054 against the dollar by 05:03 GMT, having stood at 3.8035 at the close on March 7.
“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 late on March 7.
The downgrade of Turkey’s rating was driven by two key developments, according to Moody’s.
First is the continued loss of institutional strength, further weakness in monetary policy, and delays in implementing core structural economic reforms.
Second is the increased risk of an external shock based on Turkey’s wide current account deficits and higher external debt.
The reason for changing the outlook to stable derives from the country’s economic and fiscal strengths, mostly based on Turkey’s large and dynamic economy and favorable government debt metrics, Moody’s said.
Moody’s, which cut Turkey’s credit rating to junk status in 2016, cut its outlook to negative from stable in March last year. It changed the outlook to stable in the latest downgrade.
“Potential upward movement in Turkey’s issuer rating is constrained by its high external vulnerability. Upward rating pressure could materialize in the event of structural reductions in these vulnerabilities, i.e. a significant and sustained narrowing of the current account deficit or an elongation of the banking and corporate sector’s external debt structure. Also important would be material improvements in Turkey’s institutional environment or productivity. Reductions in political risk emanating either from the geopolitical or domestic political environment, while credit positive, would not necessarily result in upward rating actions in the absence of sustainable improvements in external vulnerability,” the rating agency said.
“Turkey’s sovereign rating would likely be downgraded if there is a material increase in the probability and proximity of a balance of payments crisis relative to what is implied by the current Ba2 rating. Such an event would likely be precipitated by a reduction in foreign exchange reserves or prolonged capital outflows. Sustained lower growth and a related worsening in the government’s fiscal strength could also precipitate downward rating pressure, as could a further erosion of institutional strength and policy predictability,” it added.