Turkey faces Moody’s downgrade after failed coup

Sovereign debt rater Moody's said Monday it was reviewing Turkey's credit rating for a possible downgrade after the attempted military coup on the weekend.
A one-notch downgrade from the current Baa3 rating would push the government's rating down into "speculative" or junk status.
"Despite the coup's failure, Moody's considers its occurrence a reflection of broader political challenges, as associated credit risks remain elevated," Moody's said.
"We believe that the most recent increase in domestic political uncertainty, and most specifically the attempted coup, has the potential to significantly affect the country's growth trajectory negatively, a risk that we will evaluate during the review."
Moody's said the country has moved slower than expected on implementing economic reforms and that the growth outlook has weakened, with a forecast of 3.0 percent for this year, down from 3.5 percent last year.
The country is heavily dependent on external funding for the government and private sector, a reliance that "continues to expose the country to sudden shifts in investor confidence."
Fitch, another of the three top rating agencies, said Monday that the attempted coup and the harsh crackdown afterwards by the government of President Recep Tayyip Erdogan "highlight political risks to the country's sovereign credit profile."
"Whether this translates into sovereign ratings pressure will depend on the extent to which the government's reaction deepens political divisions and weakens institutional independence. This could undermine policy coherence and heighten the risks that external financing stresses materialize."
Fitch currently rates Turkish sovereign debt at "BBB-", one step above "speculative." Fitch said its next review of Turkey is scheduled for Aug. 19.
Meanwhile, Turkey's central bank cut a key interest rate for the fifth month in a row Tuesday.
In a statement, the bank's Monetary Policy Committee said it had reduced its overnight marginal funding rate by a quarter percentage point to 8.75 percent. All other rates were left unchanged.
The move would help banks borrow more cheaply from day to day, which could help ease liquidity restraints that emerge in the financial system at a time of heightened uncertainty.
The central bank's rate-setting body didn't mention the coup directly but said that "domestic developments have led to fluctuations in financial markets."
"Market developments will be closely monitored and the necessary liquidity measures will continue to be taken to support financial stability," it said.
The panel sought to downplay worries about the economic outlook, arguing that recent policy and liquidity measures "have increased the resilience of the economy against shocks."

Some economists had expected an even bigger reduction in the marginal interest rate of half a percentage point, in line with the central bank's last three cuts. The more modest reduction may point to some concern about the impact on the Turkish lira, which has fallen sharply since the coup attempt and could be weakened further by lower interest rates.
There's been a lot of volatility in Turkish financial assets since the coup. Turkish stocks are still way down from pre-coup levels as is the Turkish lira. The currency fell further Tuesday against the dollar, which was up another 1.6 percent at 3.03 lira. Before the coup, it was trading at 2.89.
The attempted coup and the subsequent tough response by the government have reinforced concerns over the toxic political divisions in Turkey.
A major worry is that international investors, who are badly needed for Turkey to meet its external financial obligations, will take fright and adopt a more cautious approach that further dents the Turkish lira.
The same applies to those planning to holiday in Turkey — tourism is a key sector and foreign-currency earner for Turkey. Tourist numbers this year, particularly from Europe, were already before the attempted coup expected to be sharply lower as a result of a series of attacks in the country over the past few months.
William Jackson, senior emerging markets economist at Capital Economics, said the overall tenor of the central bank's statement suggests that it is "pretty unfazed" by the political turmoil and that further cuts seem likely in the coming months.
However, he voiced his concern about how sustainable it is to keep cutting rates at this pace, especially as rising political risk turns off international investors. Lower interest rates could translate into weaker returns for foreigners investing in Turkey. If they are scared off, that could push the lira down further.
"The context here is that Turkey has a large current account deficit, so tighter external financing conditions would put the lira under pressure and cause inflation to rise," he said.
Before the attempted coup, most economic forecasters had penciled in Turkish economic growth of around 4 percent this year.

Source: Arab News