Turkey downgraded by S&P, Moody’s due to ‘extreme volatility’
Both Moody’s and Standard & Poor’s sent Turkey’s sovereign debt rating even lower into "junk" territory, citing extreme volatility and prolonged economic overheating in company statements released on Friday.
The S&P – which had already labeled Turkey’s bonds as “junk” – downgraded its long-term foreign currency sovereign credit rating to “B+”, and its long-term local currency rating to “BB-”. Moody’s followed shortly after in lowering the rating to Ba3 from Ba2 and changed its rating outlook to negative.
“In our view, the substantial weakening of the lira has negative fiscal implications while also straining corporate balance sheets and further pressuring domestic banks,” the S&P wrote in a statement. “We now project that the economy will contract in 2019.”
Credit ratings are used by investors to determine the ability of an issuer, like a country or a corporation, to meet its financial obligations, and could put additional pressure on Turkey -- which saw its currency, the lira, lose 40% of its value against the dollar this year, spurring concerns that it could cause problems for other financial institutions with a stake in Turkey.
The economic turmoil in Turkey has also been exacerbated by renewed political tensions with the U.S. over the detainment of the American pastor Andrew Brunson who’s on trial for espionage and terror-related charges connected to a failed coup attempt in the country two years ago.
President Trump has demanded that Turkey release the pastor and slapped financial sanctions on Ankara doubling the steel and aluminum tariffs. In response, Turkey has said that it will raise tariffs on American tobacco, spirits and vehicles.
According to Moody’s, the credit rating agency decided to downgrade Turkey’s status largely due to the weakening of its public institutions and the related reduction in the “predictability of Turkish policy making.”
“The probability that the Turkish authorities will manage to engineer a ‘soft landing’ of the economy is declining in the context of weakened institutions and increasing tensions with the U.S.,” the agency wrote, warning that it would lower Turkey’s rating further if the economic crisis continued to escalate. A more positive outlook, it said, is “highly unlikely.”