Page 61 - TURKRptJul19

further concerns about the transparency and independence of the central bank and, by extension, Turkey's broader institutional framework,” it added.
Ongoing disagreement between Turkey and the US. “External pressures are exacerbated by the ongoing disagreement between Turkey and the United States, this time relating to Turkey's purchase of the S-400 missile system from Russia. The sanctions which the US Congress will consider if the purchase goes ahead, while largely undefined to date, cast a further shadow over Turkey's economy and financial system.”
Risk of acute BoP crisis remains relatively low in very near term. “The risk of an acute balance of payments crisis remains relatively low in the very near term, consistent for now with the highest rating level in the single-B rating category.” “However, weakening external buffers point to this being an unstable equilibrium, and the more time passes the more the government's ability to steer the economy away from a more credit-negative path of a balance of payments crisis is diminished.”
Need for capital controls. “This [reduced ability to steer], in turn, increases the probability of more credit negative outcomes involving the need for capital controls, restrictions on access to foreign currency and (sanctions permitting) external support.”
“Number of possible near-term drivers for further instability”. In Moody's view, the re-run of the Istanbul mayoral election on June 23 creates potential for political unrest that could trigger a further material decline in the value of the lira and a further depletion of FX reserves. “The imposition of sanctions on Turkey could also lead to a further, highly credit negative, market reaction.”
Ability to access an IMF programme. “Moreover, depending on the sanctions imposed, it could also raise doubts over Turkey's ability to access an IMF programme, should one be needed in the future to avoid an escalation of a balance of payments and economic crisis.” Even if Moody's does not currently expect such a programme to be needed, the potential tension between sanctions and external support could in itself further undermine investor confidence in credit.
Likely downgrade. Moody's would likely downgrade Turkey's rating if it were to become clear that avoiding a more credit-negative path was becoming increasingly unlikely, perhaps because of the currency crisis deepening further. Any indication that capital controls were becoming more likely or that Turkey's fiscal strength was deteriorating in a significant way would be credit negative. “A material deterioration in relations with the US in the form of sanctions would also put downward pressure on the rating due to the implications that might have for receiving IMF assistance.”
“Upward rating movement unlikely”. “However, the rating could be stabilised if the authorities were able to present and, crucially, implement a credible and broad-based programme for addressing external pressures and engineering a rebalancing of the economy. Significant external financial support, and the policy agenda that would likely accompany it, would also be supportive for the rating.”
Moody’s cuts 18 Turkish banks in wake of surprise sovereign downgrade. Moody's Investors Service on June 18 downgraded 18 of Turkey’s banks, cutting their local currency long-term deposit ratings, and their local and foreign currency senior unsecured and issuer ratings (where applicable) by one notch and maintaining the outlooks as negative. The standalone baseline credit assessments (BCAs) of 16 banks were downgraded by one notch, while the BCAs of the remaining two banks—government-owned Ziraat Bankasi and Turkiye Vakiflar Bankasi (Vakifbank)—were downgraded by two notches. This rating action followed Moody's surprise downgrade, on June 14, of Turkey's sovereign bond rating to B1 from Ba3, with a negative outlook, which also resulted in the lowering of the ceiling for foreign currency deposits
61 TURKEY Country Report July 2019 www.intellinews.com