"The growth outlook for 2009 has deteriorated even more steeply in recent months, with a further weakening of indicators such as industrial production, capacity utilization and exports and a worrying rise in unemployment and jobless claims. Moody's now expects to contract this year by 4 percent or more, with the balance of risks still tilted toward the downside, depending on when the global economy revives and the credit channel eases," the agency said in its credit outlook report on Turkey.
The Turkish economy increasingly feels the impacts of the global financial crisis as the unemployment rate hovers at record highs and budget implications deteriorate. The government expects the economy to contract by 3.6 percent in 2009.
The economic downturn has seriously imperiled the country’s fiscal targets, the agency warned, adding it will update its medium-term forecasts after an agreement is signed with the International Monetary Fund on a new standby program.
"A number of fiscal support measures, i.e., tax cuts, implemented in advance of the elections will mean that the budget gap is going to be rather wide unless significant adjustments are taken quickly," Moody's said in the report.
The downturn in the economic situation dented support the ruling Justice and Development Party, or AKP, whose votes fell to 38.8 percent in the March 29 local elections from 47 percent in the general elections in 2007.
RATE CUTS IN THE PIPELINE
Moody's said it expects the Central Bank to continue its rate cuts in the coming months. The Turkish Central Bank cut interest rates to historic single-digit figures to stimulate to the ailing economy.
"The current account deficit moved into surplus during the first two months of 2009, reflecting a collapse in import demand plus much lower oil prices that surpassed the steep decline in exports and the significant tightening of credit availability," it added.
Moody's said the stable outlook is premised on the authorities' ability to manage the impact from the global crisis and to avoid a deep and sustained deterioration in relative credit metrics.
"At present, the expected worsening of the deficit and debt dynamics is not inconsistent with
Moody's also said the rating could be upgraded when the government demonstrates a stronger capacity to generate revenues and pay debt service, and follow up last year's implementation of parametric reforms in the social security system with reforms in the labor market and public sector. It could come under downward pressure if either economic or political disarray meaningfully and durably worsen the government's debt metrics.