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Turkish government bonds are already rated by rating agency Moody’s at B2, a record low for Bulgaria’s southern neighbor. Thus, Turkey is located next to countries such as Sri Lanka and Tunisia, and after Rwanda, Bahrain and Albania.
At the same time, Moody’s not only downgrades Turkey, but also sees no good prospects for the country, that is. allows an even greater deterioration of the country’s credit rating than an improvement of the current one and the return of previous positions. The penultimate change in the agency’s assessment was in 2019, and with the latest adjustment, Turkey is only two degrees below the Caa1 level, where bonds are considered highly speculative and risky, as in Iraq and Ukraine.
There are three main reasons for the negative trend, according to the German magazine Focus.
Turkey sells too much currency
Turkey’s foreign exchange reserves in euros and dollars have been declining for years, due to the Turkish central bank’s strategy of strengthening the Turkish lira through sales. What so far seems unjustified: in one year the value of the pound against the euro has fallen by 28%, and in the last five years the Turkish currency has collapsed by up to 61%.
The strategy is dangerous, as Turkey needs foreign exchange to pay its debts. Moody’s asserts that if the country’s current liabilities to foreign lenders are deducted, the net foreign exchange reserves will be close to zero. This makes the country extremely vulnerable to external shocks and limits its ability to obtain loans that it can easily repay.
A weak currency still has advantages. One of them is that this is how tourism is promoted. This led to a record number of tourists in 2019, but it cannot be repeated in 2020 marked by the coronavirus, so Moody’s believes that the risks prevail. The open fields of natural gas in the Black Sea give a ray of hope, and if Turkey begins to extract and export it, the currency will flow back into the country.
Political interference in monetary policy
In this regard, Moody’s certainly does not skimp on criticism of the Central Bank of Turkey and the government. “The political pressure, the limited independence of the central bank, the slow reaction of those responsible and the lack of predictability of their reactions increase the risks, for example of strong fluctuations in the exchange rate,” the rating agency said.
Its experts are vehemently critical of Turkey’s interest rate policy. Actually, interest rates in Turkey have been negative for a long time, incl. due to government pressure on the Central Bank, while inflation reached 11.7 percent. This discourages foreign investment, which in turn could lead to further depreciation of the pound.
Moody’s also points out specific mistakes made by the Turkish government. For example, the fact that the education system cannot produce staff who are adequately prepared for a better paid job. And the necessary reforms in this regard would take years and would be very costly in the short term.
Budget problems, falling GDP
The fact that the problems mentioned so far have not had a severe negative impact on the Turkish economy in recent years is mainly due to the well-managed state budget, according to Moody’s. In 2018, for example, liabilities represented only 29% of the country’s GDP. This is an excellent indicator around the world. But things are changing rapidly as Turkey has experienced two economic crises in the past two years: the currency crisis of 2018 and the current one caused by the pandemic. The latter will undoubtedly lead to an increase in liabilities, as although Turkey has not adopted a package to promote the situation like large industrialized countries, it will have to invest money to support the national economy. In addition, GDP is falling: the IMF forecasts a five percent drop for the entire year. And this, according to Moody’s, will mean that by the end of 2020, liabilities will already represent 42.9 percent of the country’s GDP.
Erdogan is outraged
President Recep Tayyip Erdogan has reacted sharply to Moody’s assessment: “These ratings are worthless,” he said. According to him, the Turkish economy had peaked and the real facts said otherwise.
In this situation, no significant changes in Turkish monetary policy can be expected, which increases the risk of a further downgrade of the country’s credit rating. The other rating agencies also do not give Turkey a high rating: Fitch assigns a BB level with a negative outlook for the country, and Standard & Poor’s currently rates Turkey as the highest: B +.
At the same time, the Turkish currency continues to depreciate. At the end of last week, it posted a record drop against the US dollar: 7.59 pounds to the dollar. In total, the Turkish lira has lost ten percent of its value against the dollar in the last three months. During the same period, the pound depreciated more than 16 percent against the euro.
Turkey
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