LONDON — Turkish financial markets took a battering Monday after ratings agency Moody’s downgraded the country’s credit grade to junk status to account for a series of shocks to the economy that included bombings and an attempted coup.
The Istanbul 100 stock index fell 3.8 percent and the national currency, the lira, also took a hit. The dollar was up 0.4 percent at 2.9796 lira.
The sell-off is largely due to Moody’s statement late Friday that it was cutting Turkey’s government debt rating to Ba1 from Baa3. The downgrade means Moody’s joins Standard & Poor’s in rating Turkey below investment grade. That’s important because it will likely cost the government more to borrow on capital markets and prompt some investment funds to sell Turkish assets.
Turkey’s economy has wilted this year in the face of a string of extremist attacks and uncertainty following the failed coup on July 15 against President Recep Tayyip Erdogan that saw more than 270 people killed.
Tourism, a key component of the economy as well as a substantial foreign-currency earner, has suffered, not least because Russian tourists have stayed away in the wake of a diplomatic spat over Turkey’s downing of a Russian warplane last year.
Moody’s said the “upsurge in security-related incidents” and the sanctions imposed by Russia last year following the downing of the jet, have had “an adverse impact” on tourism, which accounts for around 4.4 percent of Turkey’s annual GDP but 15 percent of its foreign capital receipts. In the first half of this year, Moody’s said, tourist arrivals and revenues were down 27.9 percent and 28.2 percent compared with a year earlier.
The agency said that the country “continues to operate in a fragile financial and geopolitical environment.” This, it said, has “credit implications for Turkey given its dependence on foreign capital.”
According to Moody’s, Turkey’s current account deficit remains elevated at 4.3 percent this year and 4 percent next and exceeds those of other similarly rated countries.
Moody’s also cut its economic growth forecasts for Turkey to an annual average of 2.7 percent over the 2016-19 period compared with 5.5 percent over 2010-14.
Turkish Deputy Prime Minister Numan Kurtulmus dismissed the downgrade as a “political” move and part of a wider effort to undermine the country.
Kurtulmus said Turkey was determined to keep reforming the economy and to fight what he said were efforts to spread the “perception” that the country was in bad shape. He claimed that the outflow of funds following the downgrade has been limited.
Lee Hardman, a currency analyst at Bank of Tokyo-Mitsubishi UFJ, said the downgrade isn’t likely to have too much of an impact given that investors continue to look for higher-yielding assets like Turkey’s. Despite a series of cuts to interest rates, Turkey’s main overnight marginal funding rate stands at 8.25 percent. In many developed economies, benchmark rates are near zero.
“It has helped to dampen downside for the lira so far this year even as domestic political risk has increased,” Hardman said.
A longer-term concern for some investors is that Turkey is moving toward a more authoritarian model of governance, a trend that could further dent any hopes the country has of joining the European Union.
Since the coup was seen off, tens of thousands of civil servants and government bureaucrats have been dismissed while scores of businesses have been shut over suspicion of being linked to Pennsylvania-based Islamic cleric Fethullah Gulen, whom Turkey blames for the attempted coup, a charge Gulen rejects.
Moody’s said the government’s response “raises further concerns regarding the predictability and effectiveness of government policy and the rule of law going forward.”
Suzan Fraser in Ankara contributed to this report.