Moody’s downgrades Turkiye’s ratings to B3, changes outlook to stable

Moody’s Investors Service (“Moody’s”) has today downgraded the Government of Turkiye’s long-term foreign- and domestic-currency issuer and the foreign-currency senior unsecured ratings to B3 from B2.

The foreign-currency senior unsecured shelf rating was downgraded to (P)B3 from (P)B2. Concurrently, the foreign-currency backed senior unsecured rating of Hazine Mustesarligi Varlik Kiralama A.S., a special purpose vehicle wholly owned by the Republic of Turkiye from which the Treasury issues sukuk certificates, was also downgraded to B3 from B2. The outlook is changed to stable from negative for both issuers.

The downgrade to B3 reflects the following key drivers:

1. Rising pressures on Turkiye’s balance of payments with risks of a further depletion of foreign-currency reserves. Turkiye’s current account deficit will likely exceed earlier expectations by a wide margin, raising external financing needs at a time of tightening financial conditions globally;
2. The authorities are having to resort to increasingly unorthodox measures in an attempt to stabilize the currency and restore foreign-currency buffers. Inflation has risen to its highest levels for over two decades and will likely trend higher in the coming months, on the back of surging energy and food prices and also reflecting the unwillingness of the Central Bank of Turkiye (CBRT) to raise its policy rate. In Moody’s view, 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 considers this a Governance driver under its ESG framework.

The stable outlook reflects Moody’s view that the risks at the B3 level are balanced. While the authorities’ highly unorthodox economic policies will likely exacerbate the current economic imbalances, the sovereign has relatively low external debt and moderate refinancing needs for the remainder of the year and next year.

Concurrently Moody’s lowered Turkiye’s local-currency country ceiling to B1 from Ba3 previously. The two-notch gap between the local-currency ceiling and the sovereign rating mainly balances a relatively limited government footprint in the economy with unpredictable institutions and government actions, elevated domestic and geopolitical political risks and significant external imbalances. The foreign-currency ceiling was lowered to B3 from B2. The two-notch gap between the foreign-currency ceiling and the local-currency ceiling mainly reflects weak policy effectiveness as well as the low level of foreign currency reserves, which leads to elevated transfer and convertibility risks.