ISTANBUL — Concerns are growing about Turkey's economy after Moody's cut its debt-rating outlook from stable to negative.
The financial rating agency blamed political uncertainty for the move and the downgrade comes at a bad time for Turkey's prime minister, who is expected to run in the August presidential election.
The downgrade did not surprise financial markets, says analyst Atilla Yesilada, an analyst in Istanbul for Global Source Partners.
He says since last year’s wave of anti-government demonstrations, known as the Gezi protest, there has been growing concern for the economy.
"Since Gezi, Turkey has been suffering bout after bout of political instability, or that the economy has slowed down, or that the global financial conditions are very likely to tighten. In such a scenario Turkey would [have an] extremely high foreign financing requirement, which I estimate to be equal to 25 percent of GDP," he said.
Even the success of the ruling AK party in last month’s local elections is becoming a cause for concern. Initially, investors saw the victory as a sign of continued political stability.
But the chief economist of Turkey's Finansbank, Inan Demir, says there are concerns Prime Minister Recep Tayyip Erdogan has too much power.
"Because there may have been concerns on Moody’s part, regarding the concentration of too much power in the name of political stability, and perhaps they may have been concerned by the pressure on central bank as well," said Demir.
After his party's success, Erdogan called for Turkey's independent central bank to cut interest rates. The bank nearly doubled rates in January to stave off a collapse in the currency.
Economist Demir warns interfering in the bank’s independence will cause deep unease in financial markets.
"The independent central bank had been a very important pillar of Turkey’s strong recovery after the 2001 crisis. And that it would go back to market unfriendly practices of pre-2001 era, that would increase pressure on Turkey because Turkey would need strong policy-making anchors in a time of tightening global liquidity," he said.
But political analysts say Erdogan, who is expected to run in the August presidential election, is eager to cut interest rates to help the sluggish economy. A decade of unprecedented economic growth has been important to Erdogan’s electoral success.
Yesilada at Global Source Partners says the election is likely to be key to determining future of the Turkish economy.
"All rating agencies will hold and wait for the results of the presidential elections. And if the political noise continues afterwards, I am afraid toward the end of the year we may see a rating cut which would be devastating for the Turkish bond and fixed income market," he said.
Moody's last week downgraded the outlook for Turkey's government debt to negative, from stable. International ratings agencies like Moody's assess the economic or business strength of a bond issuer.
Cutting the outlook means Moody's has doubts about Turkey's ability to repay bonds in the future. Even though Moody's overall debt rating for Istanbul remains at investor grade, a downgraded outlook could make it more expensive for the country to issue new bonds.
The government has said one of its greatest achievements is that financial rating agencies have ranked Turkey's international debt as investor grade, which helps attract foreign investment and cuts borrowing costs.
Market watchers warn that with investors becoming more hesitant about emerging markets, Erdogan will have to carefully his balance presidential ambitions against the sensitivities of the financial markets.