Two of three leading credit rating agencies that grade countries’ debts lowered Turkey’s rates. What does this mean indeed?
It was a very tough summer for Turkey. After aiming for a stable political and economic structure in 2016 following consecutive elections last year, Turkey unfortunately could not achieve it. A coup attempt by July 15 came on the top of financial issues and crisis speculations that started to be voiced since the second quarter of the year. The government started to re-build the order with state of emergency and fight off with FETÖ terrorist organization. However, negative news continued to emerge from abroad. Two credit rating agencies out of three that interest Turkey particularly lowered Turkey’s rating to below investable level. What does this mean?
Three leading credit rating agencies that studies credit rates for Turkish economy are Standard & Poor’s (S&P), Moody’s and Fitch Ratings. Turkey still has no agreement with one of them, S&P. Shortly, these agencies set the reputation of a country or company via reports and statistics they prepare. This credit note is important in terms of both new funds entering to the country and the country’s feeding by foreign sources. It is considered as a proof of whether the debt owner is able to pay its debt or not and it plays a leading role in investment decisions of investors. A note of a country is generally based on economic, political and social factors. Lower or higher rates find fast and crucial reflections in financial industries of that country.
The highest rating at Moody’s is Aaa while it is AAA at Fitch. Non-investable rating is Ba 1 at Moody’s, while it is BB+ at S&P and Fitch. Countries prefer to be rated by these agencies and thus feeding their economies by new funds.
Two out of three leading agencies cut Turkey’s rating to junk
Shortly after the coup attempt, S&P lowered Turkey’s sovereign debt rating level from BB+ to BB in July, while short term level remained at B. Turkey’s foreign and local currency sovereign credit ratings were lowered by one notch in the speculative grade, to ‘BB/B’ and ‘BB+/B’, respectively, from ‘BB+/B’ and ‘BBB-/A-3’. In September, Moody’s cut Turkey’s long-term issuer and senior unsecured bond ratings by one notch to the speculative or “junk” level of Ba1 with a “stable” outlook. Credit rating agencies cited rising risks and the possibility that Turkey might struggle to find foreign funds and re-pay them later as the reason behind their decisions.
Among top three agencies, only Fitch did not lower rates and has kept Turkey’s rates at BBB- at investable level. However, the agency shifted Turkey’s rating outlook to negative from stable.
Experts underline the fact that at least two agencies would be required to give investable rate in order to let Turkey to have continuous fund flow. Thereby, Turkey may face a severe problem in terms of investment and funds. Moreover, exiting funds from Turkey surged right after Moody’s rate cut for Turkey. This exerted further pressure on TL and drove currency higher which caused USD hit 3,081 TL, a historical high.
Lower rates are highly criticized by market players as well as President of the Republic, Recep Tayyip Erdoğan and government spokesmen. It is claimed that Turkey has a stronger financial discipline and structure compared to other similar nations. Large and medium scaled investments might be affected negatively in the coming term due to serious interruptions in new funds coming while interest rates might move up due to funding issues.
In addition to those developments, OPEC (Organization of the Petroleum Exporting Countries) reached a preliminary agreement to cut crude oil output after a long period of 8 years. This would be another challenge for Turkey as it depends on import crude oil. Experts say Turkey will be experiencing tougher exams in economy which requires a strong budget control and finance more than ever.