Moody’s first to move on possible rating downgrade of Turkey – TDS

Research Team at TDS, notes that following the coup attempt in Turkey over the weekend, pressure on the country’s ratings has started to build, as we anticipated.

Key Quotes

“Moody’s was the first Agency to move, placing Turkey’s Baa3 (lowest investment grade, IG) issuer and bond ratings on review for downgrade. Prior to yesterday’s decision, the outlook was negative.

“The review is driven by the need to assess the medium-term impact of the failed military coup on Turkey's economic growth, policymaking institutions and external buffers, given the existing challenges in all of these areas. Despite the coup's failure, Moody's considers its occurrence a reflection of broader political challenges,” Moody’s said.

Moody’s stated that “any downgrade would most likely be limited to one notch” and their review will asses the likelihood and implications of: 1) a sustained slowdown in domestic demand and growth, 2) a further weakening of policy predictability and effectiveness, and 3) reduced access to external funding in a context of heightened market volatility.

S&P and Fitch rate Turkey BB+ and BBB-, respectively, with a STABLE outlook. As long as Turkey retains a minimum of two IG ratings, its status will be considered IG overall. However, a downgrade from Moody’s or Fitch, or even just the stated intention to assess the merits of a downgrade in the future, could suddenly raise the spectre of junk status.

Interestingly, Turkey’s CDS-implied ratings (average of S&P, Moody’s and Fitch), is already 1.4 notches below current level, i.e. CDS imply BB+ ratings.

Still, the risk of Turkey losing IG status is directly associated with the risk of capital outflows from investors who are barred from holding junk-rated assets, and passive benchmark investors who would replicate a possible exclusion of Turkey from IG-only bond indices only when Turkey loses IG.

Therefore, downgrade related outflows and currency weakness cannot be considered to be fully anticipated by the market.”