International credit rating agency Moody’s has announced that it has downgraded the government of Turkey's long-term credit ratings to Ba1 or 'junk' (non-investment grade) from Baa3 and assigned a stable outlook. This concludes the review for downgrade that was initiated on July 18 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.
The downgrade reflects the increase in the risks related to the country's sizeable external funding requirements and the weakening in previously supportive credit fundamentals, particularly growth and institutional strength. On the other hand, the stable outlook reflects the strengths in the credit profile, namely the government's robust balance sheet, which would allow for the absorption of shocks and flexible responses.
According to Moody’s, the erosion of Turkey's institutional strength, which was evident prior to the failed coup attempt but which the event may exacerbate, has negative implications both for the level of growth in the coming years and for the implementation of the structural changes the government has identified are needed to deliver balanced, sustainable growth and relieve external pressures. Moody's believes that the slow deterioration in Turkey's credit profile will continue over the next 2-3 years.