Moody’s rating cut raises importance of fiscal discipline for Turkey

The Moody’s rating cut last week is continuing to draw a fierce reaction, especially from the government. But we can expect these reactions to calm down after a week or so. 

It is expected that the effect of the rating cut on the markets will be limited. It is also expected that the effect on the markets will settle down in about 10 days. We have seen that the reactions in the first two days have not been excessive, and even if the reactions take a harsher course market actors are certain that this time reaction purchases will start and reset the balance within a short space of time.  

Bank executives I have spoken to estimate that in the event that the dollar rate exceeds 3 Turkish Liras and reaches levels of 3.04 liras, there will absolutely be a comeback. Through the dollar sales to be made an equilibrium of around 2.98 liras will be reached. Executives do not think there is any possibility of the dollar going down to 2.90 liras, as in the past. 

A similar development is also expected in interest rates. In the event that interest rates are hiked exceedingly, reaction purchases will start and foreign capital will once again flow in because interest rates in Turkey are still among the highest in the world, bank executives say.

In sum, following Moody’s rating cut, if no other important incident occurs, markets are expected to find a balance again at a higher level within 15 days. 

Markets had already been expecting Moody’s to cut Turkey’s credit rating to junk for about a month. The rating cut was therefore already long priced in. The reactions of the markets are thus not expected to be too harsh. 

What is most important is what will now be done. The angry reaction from members of the cabinet to the Moody’s downgrade is understandable, but the decision must now stop being made a tool for domestic politics. It is important that reactions are kept to a certain dose. The message of Deputy Prime Minister Mehmet Şimşek that the government “will continue with economic reforms” should prevail, and reforms should actually be carried out. 

No more cuts 

While Moody’s cut Turkey’s rating, it also set the outlook at “stable.” The most important reason for this is the maintaining of fiscal discipline by the government. The reasons for Turkey’s rating being cut to junk are the slowdown in growth, the further toughening of foreign financing conditions, and the weakening of institutional capacity. 

It cannot be expected that all these negativities would together switch to positive within a short time. But it should absolutely be kept in mind that fiscal discipline is the most important factor in preventing the rating from declining further. 

Since the effect of any reforms will not be seen at least for one year, the importance of maintaining fiscal discipline has increased strongly since the rating cut. Fiscal discipline now has become vital for economic stability. 

The sensitive stance adopted by Finance Minister Naci Ağbal on this matter should continue. Tough days are at the door but fiscal discipline should be maintained no matter what.