Turkey Facing Downgrade After Failed Coup

Turkey’s status as emerging markets darling may take a hit if Moody’s becomes the latest ratings agency to downgrade its bonds to junk on Friday.

Last month’s attempted coup was met with a wide-ranging crackdown by President Recip Tayyip Erdogan, which has spooked ratings agencies worried about turmoil in the country. Standard & Poor’s has already downgraded Turkey’s government debt to below investment grade.

A downgrade by another major Western credit ratings agency could add fuel to the belief shared by many within Turkey that the West has not done enough to support Erdogan following the shock attempt to remove the government.

Aside from the potential for further unrest, there are also concerns about headwinds in the economy, even though it is forecast to grow by around 3.5 percent in 2016, according to the World Bank – as Tim Ash, head of CEEMA desk strategy at Nomura pointed out, a rate which is “still the envy of developed and emerging markets”.

However, inflation rose much more quickly than expected in July, by 8.8 percent, which “will make it difficult for the central bank to justify any further loosening of monetary conditions”, William Jackson, senior emerging markets economist at Capital Economics, wrote in a research note.

Much of the faith which has been placed in Turkish investments recently has come as a result of the central bank’s aggressive post-coup actions, including a cut in interest rates and the promise of “limitless liquidity”. If the bank’s actions are limited, this could affect the pricing of bonds.

via CNBC

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Alfonso Esparza

Alfonso Esparza

Senior Currency Analyst at Market Pulse
Alfonso Esparza specializes in macro forex strategies for North American and major currency pairs. Upon joining OANDA in 2007, Alfonso Esparza established the MarketPulseFX blog and he has since written extensively about central banks and global economic and political trends. Alfonso has also worked as a professional currency trader focused on North America and emerging markets. He has been published by The MarketWatch, Reuters, the Wall Street Journal and The Globe and Mail, and he also appears regularly as a guest commentator on networks including Bloomberg and BNN. He holds a finance degree from the Monterrey Institute of Technology and Higher Education (ITESM) and an MBA with a specialization on financial engineering and marketing from the University of Toronto.
Alfonso Esparza