ISTANBUL
The Turkish lira weakened to 2.99 against the dollar on Monday after ratings agency Moody’s cut Turkey’s sovereign credit rating to “junk,” citing worries about the rule of law after an attempted coup and risks from a slowing economy.
At 0620 GMT, the lira stood at 2.9940 against the US currency, weakening from 2.9550 on Friday evening before Moody’s announced its decision late that night. Overnight it touched a low of 3.0040 in illiquid trade.
Finansbank chief economist Gokce Celik said the cut will trigger an outflow of funds by investors, such as pension funds, who require at least two investment grades to buy sovereign debt.
“More importantly, it will lead to repricing of TRY [lira] denominated assets, pushing the cost of external borrowing higher while rendering the currency weaker,” Celik wrote in a note.
“Favourable global environment might partly curb the sell-off pressure in the short run,” the note said. “Yet, we think the ongoing risk-on sentiment is likely to be challenged by US election uncertainty as the date draws closer.” The agency cut the government’s long-term issuer and senior unsecured bond ratings debt to non-investment grade Ba1 from Baa3. It kept its outlook on the rating “stable,” saying Turkey’s flexible $720-billion (Dh2.64 trillion) economy and strong fiscal track record offset the balance-of-payments pressures it faces.
Turkey depends on investment flows to fund its current account deficit — one of the biggest in the G20 — and service its foreign debt. Ratings downgrades could force it to pay more to borrow money in international markets.
Prime Minister Binali Yildirim said the action, which came late on Friday, showed Moody’s was not being impartial nor basing its rating solely on economic factors.
The downgrade followed a two-notch cut by Standard and Poor’s right after the failed putsch on July 15. Of the three major agencies, only Fitch has Turkey on investment grade and it is due to review that rating at the start of 2017.
