Moody's downgrades Turkey deeper into junk territory on balance of payments risks

Government's measures have not stabilised lira and raised foreign exchange buffers, rating agency says

Moody's Investors Service downgraded Turkey's ratings deeper into junk territory, citing rising pressure on the country's balance of payments with risks of a further depletion of foreign currency reserves.

The rating agency cut Turkey's long-term foreign and domestic currency issuer and foreign-currency senior unsecured ratings to B3 from B2, which is six levels below investment grade. The country's current account deficit is likely to be larger than previously expected by a wide margin, the New York-based company said on Friday.

However, the outlook is stable, reflecting a view that the risks at the B3 level are balanced and that the government has relatively low external debt and moderate refinancing needs for the remainder of the year and next year, it added.

“The authorities are having to resort to increasingly unorthodox measures in an attempt to stabilise the currency and restore foreign-currency buffers,” Moody's economists said.

“It is unlikely that the increasingly complex set of regulatory, fiscal and macroprudential measures will be effective in restoring some degree of macroeconomic stability.”

Turkey is rated B by Fitch Ratings and B+ by S&P Global Ratings.

Moody's rating decision comes after Turkish inflation accelerated in July to 79.6 per cent — a 24-year high — from 78.6 per cent in June and is now among the highest levels reported globally. In Istanbul, Turkey’s most populous city, price growth exceeded 99 per cent in July from a year earlier.

Inflation has risen to its highest levels for more than two decades and will probably increase in the coming months, on the back of surging energy and food prices and the unwillingness of the Central Bank of Turkiye to raise its policy rate, according to Moody's.

Consumer price inflation will still stand at close to 70 per cent at the end of the year, according to Moody's latest forecasts.

The rise in consumer prices has already forced officials and economists to rewrite forecasts several times this year, as efforts to stabilise the lira falter at a time when Russia's invasion of Ukraine is raising the cost of commodities from food to energy.

Fitch Ratings last month also downgraded Turkey further into junk territory, citing “spiralling inflation”, policies from Ankara and the central bank that have increased macro and external risks as well as higher financing needs and limited capital inflows.

The lira, meanwhile, lost about 30 per cent of its value against the dollar this year, following a depreciation of around 45 per cent over the last two months of 2021 that was triggered by a series of CBRT interest rate cuts. The Turkish lira is the worst among 23 emerging-market currencies tracked by Bloomberg.

Turkey's external position is under greater than expected pressure, mainly as a result of surging energy prices, which are pushing up already high inflation rates and raising external financing needs, Moody's said.

The country's current account deficit is likely to be close to 6 per cent of gross domestic product this year, more than three times larger than expected before Russia's military offensive in Ukraine that began in February and much higher than last year's deficit of 1.7 per cent of GDP, it added.

“Declining foreign currency reserves are a further pressure point. While strong tourism and goods export performance provide important foreign-currency revenues, those inflows will start to slow in the autumn months, while net energy imports will likely remain very high,” Moody's said.

External financing needs are sizeable at about $250 billion or 34 per cent of GDP in 2022.

Moody's also expects Turkey to post a gradual economic slowdown in the second half of 2022 that would continue into next year.

It projects real GDP growth of 4.5 per cent for 2022 and 2 per cent for 2023, with a “material” risk of a sharper slowdown.