Moody’s May Upgrade Turkey If Market-Friendly Policies Continue

Moody’s Investors Service said Turkey’s credit rating could be upgraded if orthodox policies introduced since President Recep Tayyip Erdogan’s reelection victory in May continue and are deepened.

“The shift toward more orthodox, rules-based and predictable policy making is credit positive, and comes earlier than we had expected,” the company said in a report earlier this
week. “The new economic team has committed to bringing down inflation, reducing Turkey’s large external imbalances and ensuring fiscal discipline.”

It also noted that Turkey has “started to gradually correct the direction of monetary and  fiscal policy.”

Even if Turkey is upgraded, it would likely remain in junk territory. Moody’s rates the government’s debt B3, six steps below investment grade and in line with Angola and Nicaragua. Its outlook is stable.

Since his win, Erdogan has installed two former Wall Street bankers — Mehmet Simsek and Hafize Gaye Erkan — as finance minister and central bank governor, respectively.  The two are seeking to bolster Turkey’s credibility among international bond and stock traders by ending years of ultra-loose monetary policy and constant state interventions in financial markets. These led to an exodus of investors and sparked an inflation crisis under their predecessors.

The central bank in June raised interest rates for the first time in over two years to rein in inflation running at nearly 50%. The hikes have been too mild in the view of many economists. When adjusted for inflation, rates remain well below zero and among the lowest in the world.

Even so, investors have broadly welcomed Turkey’s recent moves. The average yield on the government’s dollar bonds has fallen to 8.1% from over 10.5% in late May, according to Bloomberg indexes. The cost of protecting against a default has dropped significantly, while foreigners have also piled in to Turkish equities.

Political Warning

Moody’s warned that political considerations may hinder the introduction of more market-friendly politics. Erdogan has long championed low borrowing costs and a growth at-all-costs strategy. He’s fired three central bank governors for not toeing the line.
Turkey will hold local elections next March.

“The risk of yet another policy shift remains significant,” Moody’s said. That’s especially the case “if economic growth were to slow more sharply than politically acceptable.”

The agency will “likely change the outlook to negative if the shift toward orthodox policies turned out to be short-lived, as has been the case in early 2021, and further macroeconomic stress arose,” it said.