LONDON: Turkey is increasingly vulnerable to economic shocks, with President Recep Erdogan’s determination to interfere with interest rates impacting the country’s creditworthiness, according to rating agency Moody’s.
The Turkish lira touched a record low against the dollar on Tuesday, hours after President Erdogan said he could exert more influence on monetary policy if re-elected in June.
“What is a worry to us is that some of the anchors of Turkey’s creditworthiness have been eroded over time. The centralization of power and interference in monetary policy is a concern to us,” Matt Robinson, associate managing director with responsibility for the Middle East at Moody’s, told Arab News.
“This could provide for a more toxic mix than in the past.”
President Erdogan’s monetary meddling threatens to compound the impact of macro-economic headwinds impacting Turkey’s economy, including rising interest rates, the increasing strength of the dollar, and rising commodities prices.
“That’s all credit negative for Turkey,” said Robinson.
Next month’s snap presidential and parliamentary elections — called by President Erdogan in April — will clear the way for a more presidential style of government rather than a parliamentary one, which has drawn criticism at home and abroad.
Robinson, who was speaking at a Moody’s forum on emerging markets said: “We are monitoring the situation there. We will see what policies are adopted, particularly post-election.”
He added: “It is quite easy to compare Turkey with Russia, where there are also geopolitical ambitions. But the foundations for Russia (one of the world’s top oil producers) are much firmer than in Turkey. With Turkey, our concerns are much more pronounced from a credit perspective.”
The Turkish lira has lost around 15 percent of its value since the start of the year amid fears about rising Turkish debt levels.
In an interview on Tuesday with Bloomberg Television in London, President Erdogan indicated he would be more pro-active in setting interest rates if reelected next month.
“When the people fall into difficulties because of monetary policies, who are they going to hold accountable? They’ll hold the president accountable. Since they’ll ask the president about it, we have to give off the image of a president who is influential on monetary policies,” he said.
The president recently described interest rates as the “mother of all evil” and called for their lowering, despite widespread calls for an emergency rise at a time when Turkey’s central bank is fighting to stem a flight away from the country’s currency.
“The president is not entirely on board with the only policy anyone imagines will help: much higher rates,” said Paul McNamara, an emerging-markets fund manager at GAM, in an interview with the Financial Times.
Erdogan told Bloomberg that his frequent interventions on interest rates influenced the central bank, and stated his intention to continue.
“Of course, our central bank is independent,” he said. “But the central bank can’t take this independence and set aside the signals given by the president, who’s the head of the executive.”
Moody’s downgraded Turkey by one notch to Ba2 in March, plunging its credit rating deeper into junk territory. It said at the time: “The government appears still to be focused on short-term measures, to the detriment of effective monetary policy and fundamental economic reform.”
The agency said that set against a negative institutional backdrop, Turkey’s external position, debt and rollover needs had continued to deteriorate.
The downgrade was shrugged off by financial markets at the time, and dismissed by Turkey’s government, which flagged up strong economic recovery after a brief dip after the failed coup in 2016.
GDP surged 7.4 percent in 2017, helped by a government stimulus package.
