International rating Agency Moody’s kept the sovereign credit rating of Turkey in the list on revision with possible fall. This is stated in the press release of the Agency, received.
“Revision of Moody’s long-term credit rating of Turkey at the level of Baa3, announced on 18 July 2016, after the failed coup attempt, continues,” the message reads. It notes that the Agency plans to complete the review within 90 days from 18 July.
Moody’s placed the rating of Turkey to the revision downward July 18 — shortly after the attempted overthrow of the Turkish government on July 15. The Agency has considered it necessary to assess the implications of these developments for economy and politics of Turkey in the medium term, “given the existing problems in these areas.” Despite the fact that opponents of Recep Tayyip Erdogan was unable to execute his plan, Moody’s analysts believe that the fact of attempt of violent change of power is a sign of a serious internal political problems which lead to increased credit risks.
The Agency planned to assess the probability of a sustained slowdown in domestic demand, which can lead to lower economic growth in the next 2-3 years, the risk of weakening political stability and efficiency in the future, and the likelihood of reducing access to external liquidity , given the high needs of the country in external borrowing in conditions of high volatility in domestic and international markets.
In the footsteps of S&P and Fitch
After a coup attempt, the two major international rating agencies — Standard & poor’s Global Ratings, and Fitch — downgraded the sovereign rating of Turkey.
July 20, S&P, which assesses Turkey as a country with a moderately high risk investment, downgraded the rating from BB+ to BB c a negative Outlook and the long-term and short-term sovereign ratings of Turkey in Lira — to BB+/B from BBB-/A-3, respectively. The Agency found that the attempted coup has strengthened the polarization of the political landscape of Turkey, the even more serious violation of the system of institutional checks and balances. S&P analysts believe that it will undermine the growth of the investment environment of Turkey and capital inflows. They expect that Turkey will have to roll over 42% of total external debt [of more than $170 billion, or 25% of GDP] over the next 12 months. In addition, the Agency is concerned that the Turkish government is committed to reforms in the conditions, when tens of thousands of civil servants dismissed or suspended from work.
Economic indicators of Turkey could worsen if political uncertainty will lead to a further weakening of the investment environment in the country, experts say S&P. At the same time they announced the possibility to improve the Outlook on the ratings to stable if the budget deficit will remain small and the independence of key institutions of Turkey will not change.
Fitch revised the credit rating of Turkey on July 22. The Agency lowered the rating of long-term liabilities of the country from BBB to BBB minus. A rating higher than “junk”. According to analysts Fitch, solvency remained at a satisfactory level, with a stable Outlook.
Losses $100 billion
In recent years, Turkey demonstrated one of the best economic performance among emerging markets. In 2015, GDP grew by 4% in the first quarter of 2016, annual growth was 4.8%, surpassing analysts ‘ forecasts. According to the Arab English-language newspaper Asharq Al-Awsat, in 2016 before the attempted coup of Turkey on growth of the stock market, which accounted for 15%, ranked ninth in the world and the second in Eastern Europe. According to UNCTAD, foreign direct investment (FDI) to Turkey in 2015 has increased from 2014 by 36%, to $16.5 billion, Turkey is the largest recipient of FDI in West Asia.
However, the three largest international rating agencies expressed concerns about the risks of the Turkish economy. “The geopolitical situation has deteriorated… Key credit weakness are external factors,” explained Fitch. The Agency is reminded of the military conflict in Syria, the terrorist attacks in the country, the worsening of the conflict of the Turkish authorities and the Kurds, about the complication of relations with Russia.
In 2016 against the background of these factors, the inflow of foreign investment in Turkey began to decrease: from January to may, according to UNCTAD, the inflow of foreign capital amounted to $15.8 billion, of which only $2.3 billion was foreign direct investment.
The attempted coup has exacerbated fears among investors about political stability in the country and the sustainability of its economic and financial systems. Investors began to worry on Friday, as soon as there appeared the first information about the riots. July 15 Lira fell to an eight-year low, decreasing by 4.6% to 3.02 per $1. Shares of the investment Fund iShares MSCI Turkey ETFlinked securities of Turkish companies decreased by 2.5% to $41,60, following the close of trading in new York.
According to preliminary data of the Ministry of industry and trade of Turkey on 2 August, the failed coup cost the Turkish economy 300 billion lire, or more than $100 billion According to the head of the Ministry of Bulent Tufekci in the medium term, the amount is likely to grow. “Many orders from abroad [because of the events in Ankara, about any orders in question — not specified] were cancelled. Many foreigners refused their visits to Turkey. The forces of the coup, Turkey is perceived as a third world country. People who saw tanks in the streets and the bombing of the Parliament building here will not go”, — he explained to journalists in Ankara [quote Hurriyat]. All of this, he said, in the medium term will entail additional costs.
The exam for the markets
The Turkish authorities were quick to assure investors that the attempted coup will not cause serious damage to the national economy. On 17 July, the Central Bank held an emergency meeting on which has declared its intention to provide banks with unlimited liquidity to maintain stable functioning of the financial market. Writes Hurriyat, the Bank intends, if necessary, to raise the threshold of daily currency trading public, established at $50 million in addition, the government plans to create a sovereign wealth Fund.
Shortly before the publication of Moody’s decision the head of the state Bank Türk Eximbank [created for the state support of export] Hayrettin Kaplan said that the Agency does not need to change the rating, because after the coup attempt, the government and the Central Bank took measures to support the economy. “When the effect of them will be visible, no reason to downgrade the credit rating of Turkey: its economy is better than in April 2014 [when the Agency changed the Outlook on Turkey from stable to negative]”, he said to the Anadolu news Agency on 2 August [quoted by Hurriyat].
At the same time, Kaplan lauded the “restraint” of Moody’s, which in July announced the intention to examine the situation in Turkey, and not directly downgraded, as Standard & Poors. S&P, he called hasty. Kaplan stressed that Turkey reduced the deficit and is now one of the growing economies in South-West Asia. “It will become clear that neither the coup nor the decision [of the government] about the state of emergency will not affect the markets and the Turkish economy”, — said the head of Türk Eximbank.
He added that in the coming days, Turkey will have good news on exports from Turkey.” “The continuous growth of exports to the EU and improvement of relations with Russia will improve the situation with exports in the near future. Türk Eximbank operates in conjunction with the Ministry of economy to solve the challenges that exporters may face after a coup attempt,” — quoted by his newspaper.
Tufekci called a coup attempt severe test for Turkish financial market and stressed that he successfully managed. In his opinion, if similar events happened in many other countries, the markets would be closed for at least a week — but not in Turkey. The plotters tried to seize power in the night of Saturday, July 16, but all banks, stock exchanges, commodities markets and commercial centers have opened next Monday. “We did not observe significant growth rates. The main stock index fell to a limited extent. We have no need to revise the indicators on GDP or exports. Our people are steadfastly withstood a coup attempt. Over $10 billion was converted into Lira and deposited in banks. It is possible to avoid uncontrollable growth of the dollar. Our markets have not experienced a significant withdrawal of foreign capital,” — said the Minister.
At the same time, he asked to be “understanding and patience” representatives from the tourism sector, which is experiencing difficult times: as noted by the Hurriyat, after a coup attempt, the authorities canceled the holidays of civil servants — more than 3 million people — and citizens annulled about 1 million of bookings in the hotels.