Post-election credit profile will be driven by macro policy direction in Turkey, said Moody's.
"Post-election credit profile will be driven by macro policy direction. Executive presidency model confers broad powers-both political and economic-on the president. The macroeconomic policies that Mr. Erdogan's government adopts will ultimately determine whether Turkey will be able to reverse its rising external vulnerability, which has been exacerbated by expansionary fiscal and monetary policy in the last two years," Moody's said in a country note published on Tuesday.
Moody's also noted that recent policy settings have heightened Turkish corporations' and banks' exposure to currency depreciation as well as the economy's exposure to the widening current account deficit.
"Even if the current account deficit narrows in the second half of the year due to the impact of the weaker lira and a slowdown in domestic demand, the deficit will remain large in absolute ($50 billion) and relative (6 percent of Gross Domestic Product) terms," Moody's added.
"Notwithstanding the growth of the economy in recent years, Turkish authorities have made only limited headway in addressing the structural economic problems that ultimately give rise to its persistent external deficits. Increasingly expansionary fiscal policy has stimulated growth to unsustainable levels, whereas longer-term economic reforms intended to raise potential growth on a sustainable basis have been largely sidelined."
Underlying that Turkey has survived a number of economic and financial shocks in recent years despite its underlying vulnerabilities, "This resilience partly reflects fundamental credit strengths derived from a large and diversified economy and a strong fiscal position, as well as benign global monetary conditions," Moody's said.
Moody's said that Turkey's rating review announced earlier in June will focus on the incoming government's capacity and intention to implement policies that would promote sustainable growth and protect the government's fiscal strength.
