Turkey's Rating Cut Deeper Into Junk by Moody's on Default Risk

(Bloomberg) -- Turkey’s credit score slid deeper into junk as Moody’s Investors Service cut its assessment, citing an increasing risk of a balance of payments crisis and a government default.

Turkey’s long-term issuer rating was lowered to B1 from Ba3 by Moody’s, the rating company said in a statement on Friday. The outlook on the rating is negative. Turkey is now four notches below investment grade, on par with Jordan, Greece, and Uzbekistan.

“The balance of risk is firmly tilted to the downside,” Moody’s said. “The more time passes the more the government’s ability to steer the economy away from a more credit-negative path of a balance of payments crisis is diminished.”

Turkey’s planned purchase of S-400s, a Russian missile system, has strained the ties with the U.S. while underpinning investor bearishness toward the nation’s assets. The U.S. has threatened to end Turkey’s participation in the F-35 jet program by July 31 if the NATO ally doesn’t scrap the deal to buy the S-400 system, which the U.S. is concerned would be capable of collecting intelligence on the warplane’s stealth capabilities.

“The sanctions which the U.S. Congress will consider if the purchase goes ahead, while largely undefined to date, cast a further shadow over Turkey’s economy and financial system, ” according to Moody’s.

Turkey is working on its own counter-measures against anticipated U.S. sanctions, a senior Turkish official said Friday.

Moody’s had lowered Turkey’s rating in August amid a rout in the nation’s currency citing weak currency, runaway inflation and current-account deficit as key vulnerabilities.

“Foreign exchange reserve buffers are weak and Moody’s expects them to weaken further over the next two years relative to economy-wide short-term liabilities,” Moody’s said.

The decision to re-run the Istanbul mayoral election has also raised uncertainty about authorities’ policy response in the likely event that any economic recovery is slower than officially anticipated, Moody’s said in May. The Istanbul vote will be repeated on June 23.

To contact the reporters on this story: Tugce Ozsoy in Istanbul at tozsoy1@bloomberg.net;Hari Govind in San Francisco at hgovind@bloomberg.net

To contact the editors responsible for this story: Blaise Robinson at brobinson58@bloomberg.net, Jim Silver

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