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shocks involving further capital outflows, loss of reserves,
a weakening in the exchange rate, rises in inflation and severe damage to medium-term growth.
As a result, Moody's said it believed that the country's vulner- ability to an acute and highly disruptive balance of payment crisis that ultimately would significantly constrain the capacity and perhaps the willingness of the government to service its debt was now more aligned to a single B rating, despite its still moderate debt burden relative to similarly-rated peers.
“Intermittent currency crises”
“Turkey is indeed once again facing intermittent currency crises after a period of relative calm that lasted from late September 2018 through February 2019,” Moody’s said.
“In consequence, both gross and net reserves have fallen since February, with the decline in net reserves being particularly pronounced. Gross and net reserve levels have been structur- ally weak for many years, but this decline contributes to a significant increase in external vulnerability for the country.”
For 2019, Moody's expected that short-term external debt repayments, currently maturing long-term external debt, and total non-resident deposits would total more than 2.6 times the level of FX reserves.
“Moreover, funding costs have risen rapidly, with yields up by around 400 basis points since February,” Moody's said.
Fall in FX Reserves
“The fall in FX reserves seems contrary to the central bank's longstanding policy to allow the exchange rate to float freely, and raises further concerns about the transparency and independence of the central bank and, by extension, Turkey's broader institutional framework,” it added.
Other observations made by Moody’s included the following:
Ongoing disagreement between Turkey and the US
“External pressures are exacerbated by the ongoing disagree- ment between Turkey and the United States, this time relating to Turkey's purchase of the S-400 missile system from Rus- sia. 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 prob- ability 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.
“Turkey is indeed once again facing intermittent currency crises after
a period of relative calm that lasted from late September 2018 through February 2019”
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 exter- nal financial support, and the policy agenda that would likely accompany it, would also be supportive for the rating.”
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