Ruling Party Divisions Keep Turkey Risks High, Moody’s Says

Risks to the Turkish economy remain “skewed to the downside” after Prime Minister Recep Tayyip Erdogan’s victory in presidential elections, as infighting in the ruling party looms, Moody’s Investors Service said.

Erdogan’s election win does little to resolve the nation’s structural problems including its current-account deficit, which leaves the economy vulnerable to swings in investor sentiment, analyst Alpona Banerji said in a report e-mailed today. Political uncertainty will remain elevated at least until Erdogan names his successor as premier and until general elections next year determine how divisions within the ruling Justice and Development, or Ak Party, will affect economic policy, the report said.

“Until the political landscape reaches some stability, the country’s structural reform agenda is likely to suffer, leaving Turkey exposed to potential shifts in international market sentiment at a time when the country’s economic challenges and external vulnerabilities remain significant,” the report said. “The evolution of intra-AKP dynamics will likely extend the climate of political tension and uncertainty that has prevailed since mid-2013.”

Turkey’s economic expansion will slow to 3 percent from last year’s 4 percent as unfavorable geopolitical developments in neighboring Russia and Iraq limit the positive impact of increased exports in the second half of this year, Moody’s said. Turkey’s high inflation rate, which contributes to low savings, is also a contributor to volatility in growth, Moody’s said.

Bank Independence

A series of rate cuts by the central bank since May have fueled inflation risks, Moody’s said. The bank’s rate cuts “are likely to fuel questions about the central bank’s independence,” it said.

The lira fell after the Moody’s statement, extending today’s losses. The currency traded 0.5 percent lower at 2.1635 per dollar at 1 p.m. in Istanbul. Yields on two-year notes rose 5 basis points to 9.3 percent, reversing an earlier decline. The cost to insure Turkish debt against default using credit default swaps rose 4 basis points to 186.

Erdogan will formally move to the presidency on Aug. 28, replacing Abdullah Gul, with whom he co-founded the Justice and Development Party that’s ruled Turkey since 2002. The party is divided between “a more consensus-driven wing” led by Gul, and a “more autocratic wing” led by Erdogan, Moody’s said.

Moody’s rates Turkey at Baa3, its lowest investment grade, with a negative outlook. The company declined to comment on Turkey on Aug. 8, one of its three designated dates for the potential release of sovereign credit rating actions.

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