Turkey credit rating Downgraded: What is the next challenge?


In the aftermath of a failed coup attempt in Turkey and a series of important decisions made, the Turkey credit rating was downgraded by major rating agencies. 

1 August, AtoZForex – After the three-day military coup attempt, one the vital decisions announced was the state of emergency for at least 3 months. A ‘purge’ in the judiciary, education, police, and military demonstrate the gravity of the situation in Turkey. As a result, the Turkish Lira took a hit and USDTRY made a new high at 3.0950, while ISE100 index dropped to the 70K area.

Moody’s and Fitch Ratings of Turkey

In the light of these events, S&P made a decision to downgrade Turkey’s ratings to BB with a negative outlook, solely based on politics. Furthermore, Moody’s reported that the Turkey credit rating could be downgraded to junk status. Considering the political uncertainty in the country, which caused a possible escalation of capital outflows. On top of this, Moody’s placed 17 Turkish Banks under review, whose ratings were downgraded. Meanwhile, Fitch Ratings mentioned that credit profiles of the Turkish banks are sensitive to the country risks, access to foreign credit markets and the lira exchange rate.

Currently, both Fitch and Moody’s are the only two institutions that deem Turkey as ‘suitable for investment’.  Some funds require ratings from at least two rating agencies to invest in the country. In the case of a downgrade, investors will get away from Turkish assets. In response, approximately 10 billion dollars worth of capital outflow will be expected from the Turkish government bonds and private sector bonds.

General Economic Outlook

The general overview of the situation in Turkey remains positive,  as the economy is strong. However, a soaring USDTRY means that the input costs are rising, which may result in higher inflation rates and in low GDP expectations. Consequently, companies may refrain from making new investments. In regards to the price stability, the Central Bank of Turkey will play the key role. We will see if the Central Bank’s precautions against the liquidity crunch will be sufficient or not. The liquidity crisis might lead to the recession of the Turkish economy. Although, it is not the case at this stage. Considering that the political risks and rating cuts continue to pose a risk to the financial markets.

Additionally, markets are trying to offset their losses caused by the coup attempt. The downgrade of Turkey credit rating can accelerate selling pressure for ISE100 index with a 20% decline, resulting in the 60-62k mark. Also, if USDTRY breaks above the 3.04-3.05 levels, the pair’s new top 3.0950 and 3.1250 -3.1500-3.2000 are the next resistance levels to look out for. Furthermore, the selling pressure on bonds accelerated, as the benchmark bonds rose from 8.6% to 9.6%, while interest rates could rise above 10%.

About the contributor

This article was written by Gizmen Nalbantli, Chief Analyst at Işık Menkul Değerler A.Ş.

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