S&P, Moody’s Downgrade Turkey

Turkey's economy is being hurt by a 40% drop in its currency, the lira, and skyrocketing inflation.
William SprouseAugust 20, 2018
S&P, Moody’s Downgrade Turkey

Standard & Poor’s last week cut Turkey’s sovereign credit rating, citing extreme volatility in the nation’s currency, the lira, as well as the likelihood of a recession next year.

“The downgrade reflects our expectation that the extreme volatility of the Turkish lira and the resulting projected sharp balance-of-payments adjustment will undermine Turkey’s economy. We forecast a recession next year,” Standard & Poor’s said. The credit rating agency cut Turkey’s rating to “B+” from “BB-“, putting it deeper into junk territory, and kept Turkey’s outlook stable.

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Meanwhile, Moody’s cut its sovereign credit rating for Turkey to “Ba3” from “Ba2” and changed its ratings outlook to “negative” on a weakening of the nation’s public institutions, which it said made policy-making more unpredictable.

“That weakening is exemplified by heightened concerns over the independence of the central bank, and by the lack of a clear and credible plan to address the underlying causes of the recent financial distress,” Moody’s stated.

Turkey Istanbul street sceneThe lira has lost about 40% of its value relative to the U.S. dollar this year, which S&P said puts pressure on the indebted corporate sector and increases the funding risk for the nation’s banks. The agency forecast that inflation would peak at 22% over the next four months.

Moody’s said, “The tighter financial conditions and weaker exchange rate, associated with high and rising external financing risks, are likely to fuel inflation further and undermine growth, and the risk of a balance-of-payments crisis continues to rise.”

The government of Turkish President Recep Tayyip Erdogan has been engaged in an escalating series of spats with the United States over sanctions, tariffs on Turkish steel and aluminum imports, and threats to boycott U.S. electronics in retaliation, as well as the fate of detained American pastor Andrew Brunson.

“Do you think the lira will gain against the dollar if Brunson is released? Would the amount of Turkey’s debts decrease?” Kemal Kilicdaroglu, head of the Republican People’s Party, said last week.

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