Turkey outlook hinges on ability to spur growth, but risks remain: Moody’s

ISTANBUL - Reuters

Turkey’s credit outlook will hinge on the new government’s ability to tackle slowing growth and high inflation as credit risks of the country still remain, ratings agency Moody’s said on Nov. 4.

The Justice and Development Party (AKP) won back its single-party rule in an election on Nov. 1, ending months of uncertainty for investors and briefly sending assets sharply higher.

But that rally largely petered out after a day, and investors are once again forced to confront deeper structural problems, such as waning growth and large external financing needs.

“The election result removes political uncertainty,” Alpona Banerji, a senior credit officer at Moody’s told a conference in Istanbul.

“However, the credit outlook will be determined by the policy environment and policy implementation that would overcome a slowdown in growth and high inflation, as well as the inhospitable capital environment that most (emerging markets) are going to be facing.”

Government officials said in July the economy was likely to expand between 2 and 2.5 percent this year, falling far short of an official target of 4 percent, due to the uncertainty after a June election failed to produce a single-party government.

Economists also expect growth will fall short of official targets next year, too, a Reuters poll has shown.
Moody’s has a “Baa3” rating on Turkey, with a “negative” outlook. It is next due to review Turkey on Dec. 4.

‘Policies matter’

Investors have been hoping the new government will see Finance Minister Mehmet Şimşek and former Deputy Prime Minister Ali Babacan once again named to the economic team. Both men are well known by foreign investors and are seen of anchors of investor confidence.

But Moody’s Banerji the actual names were not important.

“We’re pretty agnostic about who comes to power, we’re not tied to any one individual,” he told Reuters on the sidelines of the conference.

“It is the policies that matter to us. It is the economic policy execution, trying to weaken this link between the current account and growth.” 

 The rating agency said despite the majority win for AKP lowering political uncertainty, banks in Turkey still face elevated risk aversion towards emerging markets and elevated geopolitical risks in a note on Nov. 2. 

“Key to the the country’s banking system outlook will be the new government’s economic strategy and the extent to which reforms boosting the country’s savings rate and growth potential are introduced, both essential to tackle fragile investor confidence and volatile Turkish lira,” it added.