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Turkey’s economy under spotlight after failed coup

Turkey's status as emerging markets darling may take a hit if Moody's becomes the latest ratings agency to downgrade its bonds to junk on Friday.

Last month's attempted coup was met with a wide-ranging crackdown by President Recip Tayyip Erdogan, which has spooked ratings agencies worried about turmoil in the country. Standard & Poor's has already downgraded Turkey's government debt to below investment grade.

A downgrade by another major Western credit ratings agency could add fuel to the belief shared by many within Turkey that the West has not done enough to support Erdogan following the shock attempt to remove the government.

Turkish solders at Taksim square as people protest against the military coup in Istanbul on July 16, 2016.
Ozan Kose | AFP | Getty Images
Turkish solders at Taksim square as people protest against the military coup in Istanbul on July 16, 2016.

Aside from the potential for further unrest, there are also concerns about headwinds in the economy, even though it is forecast to grow by around 3.5 percent in 2016, according to the World Bank – as Tim Ash, head of CEEMA desk strategy at Nomura pointed out, a rate which is "still the envy of developed and emerging markets".

However, inflation rose much more quickly than expected in July, by 8.8 percent, which "will make it difficult for the central bank to justify any further loosening of monetary conditions", William Jackson, senior emerging markets economist at Capital Economics, wrote in a research note.

Much of the faith which has been placed in Turkish investments recently has come as a result of the central bank's aggressive post-coup actions, including a cut in interest rates and the promise of "limitless liquidity". If the bank's actions are limited, this could affect the pricing of bonds.

"The move to junk would be a subjective decision, based on assumptions on institutional strength, post coup, not really on objective criteria," Ash argued.

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