Turkey’s investment grade hangs in balance as post-coup purges deepen Moody’s has Turkey on review for possible downgrade
A crackdown in Turkey after a failed coup could further weaken its institutions and threaten its investment grade status, investors fear, as dismissals and detentions stretch from the judiciary into the private sector and even the central bank. Turkey has suspended, detained or put under investigation more than 60,000 soldiers, judges, teachers, journalists and others suspected of ties to the network of US-based cleric Fethullah Gulen, whom it blames for the July 1516 coup attempt.
What began as a purge in the security services and judiciary has spread to commercial firms and financial institutions. The head of research at brokerage AK Investment had his licence revoked on Tuesday over a report to investors analyzing the coup plot, while the chief of Turkey’s biggest petrochemicals firm Petkim was detained in connection with the events, the staterun Anadolu news agency said. Turkish Airlines, arguably the country’s most recognized brand, has fired 211 staff over alleged links to Gulen’s religious movement, while a source at the central bank said purges of junior officials had also started there.
“It’s certainly fair to say that foreign investors are concerned about the extent to which the purges will impact stability over the near to medium term, and what the impact on business confidence and investment propensity will be,” said Manik Narain, a Londonbased strategist at UBS. Turkish officials dismiss suggestions that the crackdown is too heavy-handed, pointing out that never in Turkey’s history have its own warplanes been used to bomb parliament as they were during the abortive coup, and that many of the more than 240 people killed were civilians.
But in investment banks and Western capitals, many fear the purges are being used by President Tayyip Erdogan to tighten his grip and erode the already fragile independence of institutions including the courts and the media. Moody’s said on July 18 it was putting Turkey’s credit rating on review for a possible downgrade to junk status, citing, among other things, the medium-term impact of the failed coup on the country’s policy-making institutions and on economic growth. Fitch has also said any downgrade decision will depend on the extent to which the government’s reaction deepens political divisions and weakens institutional independence.
Standard & Poor’s meanwhile cut its unsolicited rating further into junk territory last week and changed its outlook to negative, citing political concerns following the failed coup. Turkey is rated at the lowest investment grade rung of BBB-/Baa3 by Fitch and Moody’s respectively, allowing its bonds to be bought by more conservative funds that require a country to be classed as investment grade by at least two agencies. JP Morgan estimated in a recent report that investors could dump around $10 billion worth of Turkish bonds alone if the country’s rating is cut to junk by one of the two agencies.
Government officials have been on a charm offensive to try to ensure that does not happen: Turkey needs to attract more than $200 billion annually to finance its current account deficit and pay foreign debt. Deputy Prime Minister Mehmet Simsek held two conference calls to try to calm nervous investors on July 17 and 21, telling them the failed coup would ultimately unite the nation, ease political tensions, and lead to stronger institutions.
But he also said the government, while maintaining the rule of law, would look into every institution including the treasury and central bank, as it investigates Gulen’s network. “The main problem is the eradication of meritocracy and the erosion of institutions... It will be crucial how and on which criteria they replace the purged personnel,” said Ugur Gurses, a former central banker and columnist. Central Bank Governor Murat Cetinkaya declined to answer questions on any purges at his institution at a news conference on Tuesday, although he said a statement may be made in the coming days.
Checks and balances
While Simsek, an ex-Wall Street banker who previously oversaw economic management, may be a reassuring voice, there are questions over his influence. His powers were reduced when he was reappointed in a new cabinet in May and others in government are sending less comforting signals for investors. “Simsek clearly sees the risks ... but there are limits to what he can do,” Gurses said, drawing a distinction between him and another deputy prime minister, Nurettin Canikli.
“While Simsek is trying to calm down markets, the steps taken by institutions reporting to Canikli are not helping Simsek at all,” he said. The Capital Markets Board (SPK), which reports to Canikli, cancelled the licence of Mert Ulker, head of research at brokerage AK Investment, over his report on the impact of the coup, saying he had not “fulfilled his responsibilities”. Ulker will face charges under articles 299 and 301 of the penal code covering insults to the president, the nation and state institutions, the SPK said.
“This kind of action will inevitably bring self-censorship, less criticism of policy, fewer checks and bal- ances in the system, and this might be seen as part of the institutional weakening that the ratings agencies highlighted,” said Timothy Ash, a strategist at Nomura. But he also noted Turkey’s institutions were already weak, something the credit agencies needed to weigh in the balance. “It would be naive to think that Turkey’s legal and judicial system operated to anything close to Western standards pre-coup ... Has the coup and subsequent purge likely resulted in a meaningful deterioration of the rule of law in Turkey? Actually likely not, as the bar was set low anyway.”
Finance Minister Naci Agbal told Reuters on Thursday he had held a positive meeting with Moody’s and that the agency “appreciates” the government’s fiscal discipline. He described S&P’s downgrade as hasty and was hopeful neither Moody’s or Fitch would follow suit. “I believe that the final evaluations by Moody’s and Fitch will be positive. There is a great deal of harmony between the suggestions of Moody’s and Fitch for the Turkish economy and our government’s targets,” he said in an interview.
Simsek said on Wednesday he wanted steps to be taken to prevent ratings agencies from making “erroneous decisions”, adding there was no reason for any downgrades. Cetinkaya said the central bank did not expect any rating moves in August and played down the possible impact of any cut. “Ratings are not the only determinant of investment decisions, we have seen that in the past,” he told Tuesday’s news conference, which was also attended by economists. Moody’s will assess Turkey’s rating on Aug. 5 and Fitch will release its assessment outcome on Turkey on Aug. 19. But a week is a long time in Turkish politics. While raw economic data suggests Turkey does not deserve a sub-investment grade rating, the government needs to persuade the ratings agencies that it will uphold the rule of law and is serious about forging ahead with promised economic reforms, said Ozgur Altug, chief economist at Istanbul-based BGC Partners. “Moody’s seems to be more sensitive to political developments than other agencies. Moody’s has kept Turkey’s outlook at negative since April 2014, which is a very long period for a rating agency,” he said in a report. “So there is a sizeable risk of a downgrade.”— Reuters