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Moody's downgrades Turkey's sovereign rating, markets shrug

Reuters  |  ISTANBUL 

By Daren Butler

(Reuters) - Ratings agency cut Turkey's sovereign rating further into junk territory overnight, citing a continued weakening of its economic and political institutions and the increased risks from its wide current account deficit.

The rating was downgraded by one notch to Ba2.

"The government appears still to be focused on short-term measures, to the detriment of effective monetary policy and of fundamental economic reform," said.

Set against a negative institutional backdrop, Turkey's external position, debt and rollover needs had continued to deteriorate, it said.

The downgrade was shrugged off by financial markets and dismissed by Turkey's government, which has vaunted a strong economic recovery after a brief dip following 2016's failed coup. GDP surged 11 percent in the third quarter.

"It is unfair. We have just been through the most dangerous period of recent Turkish history. We recovered very fast ... We have some major investments still going on, big projects," told in

"It is unfortunately an effect of some political feelings, some political threats. It does not reflect the reality of the Turkish economy," he said at a

had already cut Turkey's rating to a sub-investment grade Ba1 in September 2016 following the attempted putsch, which undermined investor sentiment towards what was once seen as one of the world's most promising emerging markets.

One described the downgrade as a "surprise development" that could put some pressure on Turkish markets, although he said there was no fundamental difference between a Ba1 and Ba2 rating.

"I think this decision reflects the course of Turkey-U.S. relations, as we are not in a different place in an economic sense from where we were a year ago," said the banker, who declined to be identified.

Relations between the NATO allies have become increasingly strained over a range of issues, including U.S. support for a that views as a group and the conviction of a executive in a U.S. sanctions-busting case.

There was limited reaction from Turkish assets. The lira weakened to 3.8115 against the dollar by 1210 GMT from 3.8035 at the close on Wednesday. The main share index edged 0.1 percent lower.

The 10-year benchmark bond yield rose to 12.29 percent from a close of 12.20.

"The mentioned risks are not new to the market and the focus is mostly on global risk sentiment rather than local developments," said


also referred to "the increased risk of an external shock crystallising, given the country's wide current account deficits, higher external debt and associated large rollover requirements in the context of heightened political risks".

Turkey's central on Wednesday kept interest rates steady and said it would keep policy tight faced with double-digit inflation. has repeatedly called for cheaper credit to boost the economy, leading to investor concern about political pressure on policy.

Erdogan has slammed ratings agencies' decisions and accused of making a political move with its previous downgrade in 2016. "Put a few cents in their pockets and get the rating you want, this is how they work," he said at the time.

said the erosion of Turkey's executive institutions had continued with the widespread purge that followed the failed coup in July 2016. A state of emergency was subsequently imposed and remains in place.

More than 50,000 people have been jailed pending trial over alleged links to coup plotters, while 150,000 people have been sacked or suspended from jobs in the military, public and private sectors.

lifted its outlook on to "stable" from the "negative" it assigned in March 2017.

Rival has a BB sovereign rating on Turkey, in line with rating. In January last year downgraded to "junk" with a rating of BB+, one notch higher than and

depends on investment flows to fund its current account deficit -- one of the biggest in the -- and service its foreign debt. Ratings downgrades could force it to pay more to borrow on international markets.

Last year, the Turkish current account deficit widened 42 percent to $47.1 billion, exceeding the government's target.

(Additional reporting by in Istanbul, Maria Sheahan in Berlin; Writing by Daren Butler; Editing by and Catherine Evans)

(Only the headline and picture of this report may have been reworked by the Business Standard staff; the rest of the content is auto-generated from a syndicated feed.)

First Published: Thu, March 08 2018. 17:58 IST