Turkey’s credit rating was cut further into junk by Moody’s Investors Service on an erosion of institutional strength and more risk of external shocks. The lira dropped.

Moody’s lowered the rating to Ba2 from Ba1, two levels below investment grade, with a negative outlook, Moody’s analyst Kristin Lindow said in a statement Wednesday. That leaves the nation on par with Brazil, Croatia and Costa Rica.

The government of President Recep Tayyip Erdogan appears focused on short-term measures, undermining effective monetary policy and economic reform, Lindow wrote. Persistent inflation and political drivers, such as the ongoing state of emergency following an attempted coup in 2016, have weighed on the country. Debt and rollover needs have worsened, she wrote.

"The potential triggers of a re-evaluation of Turkish country risk by foreign investors continue to multiply with the continuing deterioration of Turkey’s geopolitical situation," Lindow wrote. "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."

The lira fell about 0.25 percent to 3.8038 per U.S. dollar after the downgrade. It’s little changed so far this year, compared with a 2.5 percent gain in the MSCI index of emerging-market currencies.

Moody’s also downgraded the long-term senior unsecured debt of a Turkish special purpose vehicle used to to issue sukuk lease certificates, Hazine Mustesarligi Varlik Kiralama.

Source:
courtesy of BLOOMBERG

by Justin Villamil

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