Aljazeera
Sept. 14, 2020

Moody's warns of possible balance-of-payments crisis as it cuts Turkey
debt rating deeper into junk.

by Sydney Maki, Netty Ismail and Cagan Koc Bloomberg

Turkey had its debt rating cut deeper into junk by Moody's Investors
Service, which warned of a possible balance-of-payments crisis in
assigning the lowest grade it's ever given to the country.

The sovereign credit rating was cut to B2, five levels below
investment grade and on par with Egypt, Jamaica and Rwanda. The
company kept a negative outlook on the rating, saying fiscal metrics
could deteriorate faster than currently expected.

"Turkey's external vulnerabilities are increasingly likely to
crystallize in a balance-of-payments crisis," London-based Moody's
analysts Sarah Carlson and Yves Lemay said in a report Friday.

Moody's, which last downgraded Turkey more than a year ago, now ranks
it one level lower than S&P Global Ratings and two notches below Fitch
Ratings. Turkey held an investment-grade score from two of the three
major credit assessors prior to the July 2016 coup attempt against
Presidet Recep Tayyip Erdogan.

Turkey's standing with investors has suffered as Erdogan pursued an
approach that prioritized growth above all else. The reliance on
credit stimulus has exposed the vulnerabilities of the $750 billion
economy and came at the expense of inflation and currency instability.

Turkey's credit-default swaps, local-currency debt and the lira have
been the worst performers in emerging markets this quarter. The nation
has spent its foreign-exchange reserves faster than any other major
developing economy this year, with state-run lenders intervening in
the market to support the lira as it slid to successive all-time lows.

The government's dollar bonds have returned 0.5% since end-December,
trailing the 2.4% gain across emerging-market sovereign debt,
according to Bloomberg Barclays indexes.

But authorities have shown little sign of backing away from the
unorthodox policies that are compounding an outflow of foreign
capital. Erdogan declared Turkey to be under "economic attack"
following Fitch's decision last month to revise the outlook to
negative.

Turkey's economy is on the rise and not dipping at the moment, but
"they are downgrading our ratings again," Erdogan said in Istanbul on
Saturday after the Moody's announcement. "Do what you want to do, your
ratings are of no importance."

Moody's rationale for its decision included concern about the level of
Turkey's foreign-currency reserves, growing dollarization and the
erosion of fiscal buffers, once a source of strength.

The rating company also warned that Turkey's return to growth after
this year's shock won't be enough "to offset the impact on the upward
debt trajectory of primary deficits of around 2% and an increasing
interest burden."

Other highlights from the report:

    The government debt burden is forecast to increase from 32.5% of
gross domestic product in 2019 to 42.9% in 2020 and then above 46% of
GDP in the coming years

    Reserves excluding gold have fallen more than 40% this year to
$44.9 billion as of Sept. 4

    If lenders' required reserves for lira and foreign-exchange
liabilities are netted out, net reserves "are now close to zero"

    Rising geopolitical risks "could be an accelerant for any crisis"

    While Turkey's recent gas finds may provide some relief to the
current account balance, Moody's said they are unlikely to come on
stream quickly enough to ease threats to Turkey's external accounts

"As the risks to Turkey's credit profile increase, the country's
institutions appear to be unwilling or unable to effectively address
these challenges," Moody's said.

Source: Bloomberberg