Moody’s Warns Political Tensions Threaten Turkey’s Economic Gains

Court ruling easing pressure on opposition offers short-term market relief, but investor confidence remains fragile amid mounting political risks.

ISTANBUL — Moody’s Ratings has warned that rising political tensions in Turkey risk undermining the country’s hard-won economic progress following two years of orthodox monetary management, Bloomberg reported Friday.

Speaking at an Islamic finance conference in Istanbul, Alexander Perjessy, vice president and senior credit officer at Moody’s Investors Service, said Turkey’s credit outlook had improved significantly over the past two and a half years but has now hit a standstill.

“The credit-positive momentum has reached a plateau,” Perjessy said, noting that political instability could erode investor confidence and reverse macroeconomic gains.

The warning comes as Turkey’s main opposition, the Republican People’s Party (CHP), faces what critics describe as a sustained political crackdown. Over the past year, more than 10 CHP mayors and around 500 party officials have been detained on charges ranging from corruption to terrorism — allegations widely viewed as politically motivated.

Among those jailed is Istanbul Mayor Ekrem İmamoğlu, one of President Recep Tayyip Erdoğan’s most formidable rivals and the CHP’s declared presidential candidate for the 2028 elections.

Perjessy warned that “political tensions are threatening to reverse some of the gains in macro stability,” adding that renewed unrest could weaken the lira and complicate the Central Bank’s monetary policy. “Maintaining stability in the local currency is crucial to preventing renewed dollarization,” he said.

Moody’s: Progress Stalling Despite Policy Improvements

Moody’s has upgraded Turkey’s sovereign credit rating three times in the past 18 months, citing stronger economic management and efforts to restore policy credibility. Yet inflation remains stubbornly high.

Official data showed consumer prices accelerating again in September — the first monthly rise in over a year — fueled by robust domestic demand and rapid credit growth.

“Core inflation has been stuck at around 2% on a monthly basis for some time,” Perjessy said. “That’s why inflation is not falling as fast as the Central Bank would like.”

Despite persistent price pressures, the Central Bank of Turkey cut its benchmark interest rate by 100 basis points to 39.5% on Thursday, continuing a gradual easing cycle but at a slower pace than previous months.

Perjessy cautioned that further progress may depend on a sharper economic slowdown:

“Breaking inflation momentum often comes only after more pronounced economic pain,” he said.

Court Dismisses Case Against CHP Leader, Markets Rally

Hours after Moody’s warning, a Turkish court dismissed a case that could have unseated CHP Chairman Özgür Özel, providing temporary relief to investors alarmed by the recent surge in political tension.

The case, which examined alleged irregularities during the party’s 2023 internal elections, had threatened to strip Özel of his parliamentary seat. His removal would have further destabilized Turkey’s already fragile political climate.

Following the verdict, Turkish stocks jumped 5.2%, driven by a 7.8% surge in banking shares, while yields on two-year and ten-year lira bonds fell by 20 and 18 basis points, respectively. The lira, which had earlier hit a record low, trimmed losses to trade at ₺41.99 per U.S. dollar by midday.

“Today’s verdict may give Turkish assets only short-term respite,” said Piotr Matys, senior FX analyst at InTouch Capital Markets. “Investors will continue to monitor closely whether the Erdoğan administration is consolidating political control.”

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Political Crackdown Still Casting a Shadow

Despite the favorable court ruling, the opposition continues to face intense judicial scrutiny. Since taking over the CHP, Özel has accused the government of weaponizing the judiciary to silence dissent and roll back opposition gains from the 2024 municipal elections, in which the CHP dealt Erdoğan’s party its biggest defeat in nearly five decades.

The arrest of İmamoğlu in March triggered mass protests and a $50 billion central bank intervention to stabilize the lira after markets tumbled. Foreign investors have since withdrawn $2 billion from Turkish equities and bonds — nearly half of the inflows recorded in the first quarter of the year.

As a result, Turkish assets have underperformed emerging-market peers in 2025. While MSCI’s EM currency index rose more than 6%, the lira lost 16% against the dollar, and Istanbul’s stock exchange lagged behind regional benchmarks.

Still, Friday’s verdict offered a symbolic reprieve for the opposition. CHP deputy chair Gül Çiftçi called the case “politically motivated from the start,” while Özel vowed that his party “will not bow to politically driven court decisions.”

The Erdoğan administration denies allegations of judicial interference or political targeting, insisting the cases are based on legitimate legal grounds.

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Outlook: Fragile Stability Amid Political Risk

Analysts say that Turkey’s medium-term stability hinges on both economic management and political predictability. The combination of high inflation, judicial clampdowns, and opposition arrests risks scaring off investors and reversing two years of gradual recovery.

Moody’s message, according to analysts, is clear:
Turkey’s economic progress remains “credit-positive but politically fragile.”

A critical Sunday

The detained Presidential candidate Ekrem İmamoğlu, who will be brought to the Istanbul Courthouse in Çağlayan tomorrow, said, “I will respond to this grave slander at the Çağlayan Courthouse tomorrow at 11:00.” He will be interrogated on charges of espionage, which if accepted by the court may allow the administration to appoint a pro-government trustee to run Istanbul municipality.