Fitch Ratings-London-18 July 2016: The attempted coup in Turkey (BBB-/Stable) and the authorities' reaction highlight political risks to the country's sovereign credit profile, Fitch Ratings says. Whether this translates into sovereign ratings pressure will depend on the extent to which the government's reaction deepens political divisions and weakens institutional independence. This could undermine policy coherence and heighten the risks that external financing stresses materialise.
Friday's coup attempt by elements of the Turkish military highlights the country's turbulent political environment. President Erdogan's ability to mobilise both popular and widespread political support shows there was insufficient backing for his removal, notwithstanding anti-government sentiment amid some discontent with the President's perceived shift towards greater authoritarianism.
Nevertheless, the coup attempt and the government's reaction demonstrate the political risks to Turkey's sovereign credit profile. Media has reported that more than 6,000 people have been arrested, including judges and prosecutors. This could put further strains on institutional integrity amid plans to formally increase the powers of the presidency.
Low World Bank governance scores for political stability have long been a feature of Turkey's sovereign credit profile. These factors are not incompatible with a 'BBB-' rating, but they have the capacity to weaken sovereign creditworthiness by undermining checks and balances and reducing the scope for structural economic reforms.
Domestic shocks also have the power to damage investor perceptions of sovereign creditworthiness. The government was able to regain control of the situation rapidly but the political fallout could refocus attention on Turkey's large external financing requirement if it results in significantly diminished international investor confidence.
Out next scheduled sovereign rating review is due on 19 August.
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The above article originally appeared as a post on the Fitch Wire credit market commentary page. The original article can be accessed at
www.fitchratings.com. All opinions expressed are those of Fitch Ratings.
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