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20 I Companies & Markets bne July 2019
WEEKEND WHAMMY:
Moody’s cuts Turkey deeper into junk
bne IntelliNews
In a surprise move, Moody's Investors Service has down- graded Turkey's long-term issuer ratings to B1 from
Ba3. The rating agency announced its decision on June 14 after the market close.
Moody’s also said it has maintained Turkey's negative outlook. “The balance of risk is firmly tilted to the downside,” it said.
Currently, Fitch Ratings has Turkey on BB/Negative, three notches below investment grade, where it sits together with Guatemala and Vietnam. Moody’s rates Turkey at B1/Negative, four notches below investment grade, together with Ethiopia and Tanzania, while Standard & Poor’s rates Turkey at B+/ Stable, four notches below investment grade, together with Kenya, Fiji and Senegal.
The timing of Moody’s’ announcement was unexpected since it was not scheduled to issue a rating review.
Moody's said the downgrade reflected its view that the risk of another Turkish balance of payments crisis, following on from the turmoil seen last summer, continued to rise, and with it the risk of a government default.
“The B1 rating balances these risks against the country's fundamental credit strengths, particularly its large, diversified economy and still-moderate levels of government indebted- ness,” the rating agency said.
The short-term foreign currency bond ceiling and short-term foreign currency deposit ceiling remained at Not Prime (NP/ Extremely Speculative).
Ceilings generally act as the maximum ratings that can be assigned to a domestic issuer in Turkey, including for struc- tured finance securities backed by Turkish receivables.
The decision to align the foreign currency bond ceiling and the government bond ratings reflected Moody's view that exposure to a single, common threat – loss of external confidence and capital – meant that the fortunes of public and private sector entities in Turkey were, from a credit perspective, increasingly intertwined.
“The impact of the continued erosion in institutional strength and policy effectiveness on investor confidence is increasingly outweighing Turkey's traditional credit strengths including its large, diverse economy and the low level of government debt,” Moody’s reiterated.
Turkey is structurally highly reliant on external capital flows, and Moody's confidence in its ability to continue to attract the
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large sums needed each year to repay debt and sustain growth is waning.
Turkey remains highly vulnerable to a further prolonged period of acute economic and financial volatility, according to the rating agency.
Foreign exchange reserve buffers are weak and Moody's expected them to weaken further over the next two years r elative to economy-wide short-term liabilities.
“While policy announcements have been made, the political authorities have yet to implement a plan that would allow the economy to adjust to a new, more sustainable equilibrium due to the negative short-term economic impact that this adjust- ment would entail,” the rating agency also said.
The government's willingness or ability to implement policies that will sustain external investor confidence in the economy and financial system by addressing underlying weaknesses remained uncertain, according to Moody’s.
“Since mid-2018, the government has announced a number of economic reform packages. Ultimately, these announce- ments have been either reactive to particular pressures on the economy or a restatement of measures that would be credit positive if implemented, but have been discussed for years, and where little concrete has been done to execute on these policy aspirations. Most government measures, including those targeting the banking system, continue to be focused on the near-term priority of propping up economic activity at the expense of eroding the underlying resilience of the economy and its banking system to external shocks, in part by increas- ing its fragility to shifts in market sentiment,” it said.
The longer that remains the case, the more the weakness implied by Turkey's very high reliance on external capital across all sectors of the economy comes to dominate Moody's analysis; and the greater the risk of further externally-sourced