Moody’s Pushes Turkey Debt Rating Down to B2

"As the risks to Turkey's credit profile increase, the country's institutions appear to be unwilling or unable to effectively address these challen...
Matthew HellerSeptember 14, 2020
Moody’s Pushes Turkey Debt Rating Down to B2

Moody’s Investor Service downgraded Turkey’s credit rating further into junk territory, citing its depleted foreign-exchange reserves and the policies of President Recep Tayyip Erdogan’s government.

With its Moody’s sovereign issuer and senior unsecured debt ratings now down to B2 from B1 — five notches below investment grade — Turkey, a longtime candidate to enter the EU, is on par with Tanzania, Rwanda, and Jamaica.

Moody’s is also maintaining its negative outlook on Turkey. Three weeks ago, Fitch Ratings revised its outlook on the country’s long-term issuer default ratings to negative from stable.

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“Turkey’s external vulnerabilities are increasingly likely to crystallize in a balance of payments crisis,” Moody’s said in a report Friday. “As the risks to Turkey’s credit profile increase, the country’s institutions appear to be unwilling or unable to effectively address these challenges.”

Turkey’s foreign-exchange reserves, which have been drifting downward for years on both a gross and a net basis, are now at a multi-decade low as a percentage of GDP, with gross reserves having fallen more than 40% to $44.9 billion since the beginning of the year.

“The lower gross and net reserves go, the more likely it is that Turkey experiences a severe [balance of payments] crisis, causing acute disruptions to economic activity and further deterioration in the government’s balance sheet,” Moody’s warned.

In 2019, a very strong tourism season helped shift Turkey’s current-account deficit into surplus but with the coronavirus pandemic, Moody’s predicts “Turkey will not reap this benefit next year.”

The credit-rating agency also said Turkey needs to make structural changes to address its fundamental economic challenges but the Erdogan administration’s policy initiatives in recent years “have come short in terms of addressing the structural underpinnings of Turkey’s macroeconomic problems, pointing to a lack of willingness or capacity to tackle these economic vulnerabilities.”

In maintaining its negative outlook, Moody’s cited “the downside risks associated with the authorities’ inadequate reaction function, which makes Turkey more likely to suffer a full-blown balance of payments crisis in the coming years.”

Adem Altan/AFP via Getty Images