Turkey needs credible plan to avoid downgrade — Moody’s


Moody’s Managing Director of Sovereign Risk, Yves Lemay, said this in London.

New analysis from the rating agency shows Turkey’s recession, the slump in the lira, upcoming refinancing pressures and dwindling reserves have pushed it to right near the top of its worldwide external vulnerability index.

“Failure to put forward a credible broad-based plan to address the structural issues, and in the near-term dampen the market volatility pressure on the lira…that would be a pressure point from a rating perspective,’’ Lemay said.

Moody’s downgraded Turkey to Ba3 – three rungs into junk territory – last August, but it also kept it on a ‘negative’ outlook which is a warning that another cut could happen in 12-18 months.

It gives it some time and one of Turkey’s main plusses is that it has a low debt-to-GDP level of about 30 per cent, but the likelihood is that an economic plan would be laid out after Istanbul’s mayoral elections have been re-run on June 23.

“For us, the critical issue is whether this administration has the capacity to move aside the political issues and focus on the economic needs of the country,” Lemay said.

Lemay added that the repeat of the Istanbul vote had underscored concerns.

“It is another manifestation of the domestic political risk in this instance, and the weakening of the institutions of the country.”

With regard to the drop in currency reserves, he added: “When we look at the size of what (sovereign and bank debt) is coming due in the next year against the size of the reserves, it is a signal of significant vulnerability.”

“The amount of reserves is very much insufficient to refinance the external obligations.”

Moody’s calculates the Turkish government’s interest payments rose 30.4 per cent in nominal terms in 2018 and almost 50 per cent in the first three months of 2019 due to the weak lira and a rise in payments.