Moody’s Warns Turkey on Failure to Address Imbalances

Turkey’s ability to address domestic and external imbalances will determine the country’s positive ratings momentum, Moody’s Investors Service Ltd. said.

“We have a positive outlook right now, however, the kind of domestic and external imbalances Turkey is running are of concern to us,” Sarah Carlson, Moody’s vice president and senior analyst, said in a phone interview after the company issued a report on Turkey today. “If they’re left unaddressed, they will begin to affect the positive rating trajectory.”

Turkey is “susceptible to sudden shocks or shifts in investor sentiment” because of its large current-account deficit, Carlson said. The gap has surged to record levels this year, doubling from a year earlier to $68.2 billion in the 12 months through May. The International Monetary Fund projects the deficit will reach 10.5 percent of gross domestic product by year-end.

“We particularly focus on the current-account deficit, both because it’s very large and because the way the current-account deficit is financed is using more volatile sources of capital,” Carlson said. “It’s not primarily sourced through foreign direct investment, which is more stable, it’s through portfolio inflows” and other sources including loans, the draw-down of overseas assets by companies and foreign-exchange deposits, she said.

An improvement in Turkey’s fiscal fundamentals would be positive for Turkey’s rating, Carlson said. Moody’s will be paying particular attention to the government’s medium-term program to be announced in October, she said.

Restraining Demand

Turkey’s “immediate challenge is to strengthen its resilience to external shocks by restraining domestic demand,” Moody’s said in the report. At the same time, the country should accumulate a larger buffer of foreign-exchange reserves to fend off a deterioration in the current account, Moody’s said.

“If vulnerabilities continue to increase, such as the large current-account deficit, growing inflationary pressures and strong credit growth, and external buffers diminish or remain the same, Turkey’s resilience could be undermined,” Moody’s said. “This, in turn, could cause downward pressure on the credit.”

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