TRY: Moody’s downgrades Turkey’s credit rating to junk - MUFG

Lee Hardman, Currency Analyst at MUFG, notes that the Turkish lira has been the biggest moving currency during another relatively quiet trading session on the whole and has been undermined by the announcement late on Friday from Moody’s that it has decided to lower Turkey’s credit rating from Baa3 to Ba1.

Key Quotes

“The outlook for the credit rating is now stable. Moody’s cited: i) the increase in the risks related to the country’s sizeable external funding requirements, and ii) the weakening in previously supportive credit fundamentals, particularly growth and institutional strength as the key drivers behind their decision to downgrade Turkey’s credit rating to junk status.

Moody’s believes that the slow deterioration in Turkey’s credit profile will continue over the next 2-3 years. Moody’s judged that unpredictable political developments and volatile investor sentiment have increased Turkey’s external vulnerability. In light of recent developments, Moody’s has also become more pessimistic over the outlook for Turkey’s economy which it now expects to expand more moderately by an average of 2.7% over the 2016-19 period compared to average growth of 5.5% over 2010-14. Moody’s doubts that the government will be successful at implementing sustained reforms required to move the Turkish economy’s towards more balanced growth and away from a reliance on consumption and external-capital driven growth. As a result, Moody’s believes that external risks are unlikely to diminish and may rise in the coming years.

Turkey is now rated as junk status by both Moody’s and S&P which is likely to prompt an unfavourable rebalancing of capital flows away from Turkey which should weigh on the lira in the near-term. However, the external environment of low volatility still remains supportive for high yielding currencies boosted by building carry demand. It has helped to dampen downside for the lira so far this year even as domestic political risk has increased. In this environment, the lira could continue to hold up better than expected following the downgrade to junk status. We remain comfortable with our year end forecast for USD/TRY at 3.1000.”