International credit rating agency Moody's Investors Service, downgrades Turkey's credit rating, as a result of the erosion of the country's external financial fragility, pointing institutional challenges. Turkey's credit rating lowered to B2 from B1 and the rating outlook left "negative", based on the fact that fiscal austerity measures deteriorate faster than expected.
It is seen that the factors underpinning Moody's downgrade are the balance of payments, financial balance and geopolitical risks. Dollarization is still at high levels and can be a factor in the worsening of the current account balance. In the banking system, more than 50% of total deposits continue to be foreign currency based. Import squeeze and the impact of weak TRY on export competition seem to be positive factors, but the improvement in exports is likely to be limited due to the heavy use of import inputs in some exporting sectors. Tourism revenues decreased with the effect of the pandemic and the improvement in 2021 depends on the improvement of the pandemic conditions. The budget deficit increased due to the economic support provided by the government in the pandemic period. Public fiscal balance and liabilities may also be affected by exchange rates. The high inflation effect of the depreciation of the TRY also reveals the necessity of tightening monetary policies.
Moody's made an off-calendar evaluation, downgrading credit rating down and kept the outlook negative. They will have a planned evaluation on December 4th. What we need in the short term is to increase confidence with effective policy mechanisms and reduced geopolitical tensions, and focus on economic reforms in the long term.
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