Ratings agency Moody’s on Friday lowered Turkey’s sovereign credit rating by one notch to “B3” from “B2”, citing rising balance of payment pressures and risks of further declines in the country’s foreign-currency reserves.
“(The) current account deficit will likely exceed earlier expectations by a wide margin, raising external financing needs at a time of tightening financial conditions globally,” the agency said in a statement.
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Moody’s, however, raised its outlook on the country to stable from negative, reflecting a view that the risks at the B3 level are balanced.
Turkey’s rating was cut deeper into junk by Moody’s Investors Service as balance-of-payments risks mount and authorities struggle to stabilize the lira and restore foreign-reserve buffers, commented Bloomberg.
“The authorities are having to resort to increasingly unorthodox measures in an attempt to stabilize the currency and restore foreign-currency buffers,” analysts Kathrin Muehlbronner and Alejandro Olivo wrote in a statement. “It is unlikely that the increasingly complex set of regulatory, fiscal and macroprudential measures will be effective in restoring some degree of macroeconomic stability.”
Moody’s estimates that the country’s current-account deficit will be close to 6% of gross domestic product this year, more than three times bigger than anticipated prior to Russia’s invasion of Ukraine.
Turkey’s foreign reserves are also in focus as energy import prices stay high and revenue from tourism and exports fades, Moody’s said. Even though hard-currency reserves excluding gold reached $67.7 billion in early August, the rating company pointed out that they’ve been declining for most of the year.
Inflation is another factor. Price growth in Turkey has been in double digits almost without interruption since the start of 2017, but it exploded this year to near a quarter-century high on the back of soaring commodity costs and the central bank’s reluctance to raise interest rates.
Moody’s unexpected ratings slash could reverse the ongoing improvement in Turkey’s CDS premia, which declined by 25% over the month. The rating cut comes at time when Turkish banks and non-bank corporates are sweating with foreign debt roll-overs reaching $23 bn for the last trimester of the year. Turkish Treasury, too, needs to tap global credit markets soon, to aid Central Bank reserves.
Delays in Treasury replacing its maturing obligations and potential drops in roll-over ratio of private sector FX debt could exacerbate pressure on the Turkish Lira, already reeling from widening current account deficits.
In a very timely tweet, IIF Chief Economist Robin Brooks commented:
Last time Turkish Lira was this stable was in June – July 2020, when $/TRY was anchored at 6.80 and there was official intervention to avoid devaluation. That episode ended in August 2020 with $/TRY going above 7.00. Markets see the current becalmed status of Lira similarly…
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