Turkey should take international rating risks seriously

Turkey should take international rating risks seriously

While measures are taken against the possible short-term negative effects on the markets of the failed coup attempt, its possible medium-long term damage to the economy has also become evident. It should be taken as a serious warning that international rating agencies have declared that they are reviewing Turkey’s political risk for a possible downgrading. 

International rating agency Moody’s warned that it may downgrade its Baa3 rating on the investment grade scale to junk. The agency said there was a need to assess the medium-term impact of the failed military coup on Turkey’s economic growth, policymaking institutions and external buffers. Despite the coup attempt’s failure, Moody’s said it considers its occurrence a reflection of broader political challenges, as associated credit risks remain elevated. 

Both Standard and Poor’s and Fitch have also said they are reviewing their Turkey ratings. They say that despite the failure of the coup attempt, events have created major political trouble. They have also noted that they are monitoring the reactions of the government in the aftermath. 

We see that these reactions from the three major rating agencies on the first working day after the coup attempt are also shared in the West. The first reactions of the U.S. and the EU to the debate on the reintroduction of capital punishment, as well as their expressions of concern on possible anti-democratic steps in response to the coup attempt, are directly related to the rating uneasiness. 

In short, despite the prevention of this non-democratic coup attempt, they are now afraid of anti-democratic practices from the government increasing. The expectation that in this event foreign capital will become more circumspect about Turkey is also reflected in the rating agencies’ statements. 

Political risk perception  

So we can say that a very big political risk threat is again facing the economy. The reduction of this risk is very important for the future of Turkey’s economy. 

Before anything else, the joint reaction of the four political parties represented in parliament was an important step. The continuation of this cooperation is critically important in terms of reducing political risk. 

It has reached dangerous dimensions when the reinstallation of capital punishment is debated “because the people want it.” This could mean the elimination of Turkey’s EU anchor, which is still very important for the economy. These developments will be very important in terms of foreign capital. 

In its second statement following the coup attempt, the Turkish Industry and Business Association (TÜSİAD) listed the important steps to be taken for the future of the economy. It said the cooperation and the joint stance of the political parties should continue. The same stance should also be demonstrated to elevate democratic standards and the rule of law. Transparency, fiscal discipline and the strong capital structure in banking should be maintained, it said. Strengthening all the institutions of the democratic order and all independent institutions will increase economic resilience, TÜSİAD stated.  

In sum, the steps that need to be taken are clear. But it is not clear yet which of them will be taken.