Moody’s: Further downgrade to junk for Turkish economy due to balance of payments

Turkey’s rating was further downgraded to “junk” by Moody’s Investors Service as risks to the balance of payments increase and authorities struggle to stabilize the lira and restore foreign reserves.

As Bloomberg reports, the country was downgraded to B3 from B2 on Friday by Moody’s, which also changed the outlook to stable from negative. The rating agency pointed to the chances that Turkey’s current account deficit will likely exceed earlier expectations, increasing its external financing needs as global financial conditions tighten.

“Authorities are being forced to resort to increasingly unorthodox measures in an effort to stabilize the currency and restore foreign reserves,” analysts Kathrin Muehlbronner and Alejandro Olivo wrote in a note. “It is unlikely that the increasingly complex set of regulatory, fiscal and macroprudential measures will be effective in restoring some degree of macroeconomic stability.”

Moody’s estimates the country’s current account deficit will be close to 6 percent of gross domestic product this year, more than three times larger than expected before Russia’s invasion of Ukraine.

Turkey’s foreign exchange reserves are also under fire as energy import prices remain high and tourism and export earnings weaken, Moody’s said. Although holdings of hard currency excluding gold reached $67.7 billion in early August, the rating agency pointed out that they have declined for most of the year.

Inflation is another factor. Price growth in Turkey has been in double digits almost without interruption since the start of 2017, but this year has soared to a high of almost a quarter century, due to soaring commodity costs and the central bank’s reluctance to raise interest rates.

The pound has lost more than 25% of its value against the US dollar in 2022, a decline that followed a deep devaluation in the final two months of last year and is the worst among 23 emerging market currencies tracked by Bloomberg. The pound was little changed on Friday.

“The currency remains under pressure, suggesting continued high inflation in the coming months. According to Moody’s latest forecast, consumer price inflation will still be close to 70% at the end of the year,” its analysts wrote Moody’s.

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

Moody’s stable outlook on Turkey’s rating reflects analysts’ view that the state has “relatively low external debt and moderate refinancing needs” for the rest of 2022 and 2023.