Turkey’s Investment Grade at Risk Amid Deepening Post-Coup Purges

By Asli Kandemir

ISTANBUL – Concerns are growing among investors that Turkey’s intensified crackdown following a failed coup attempt could further destabilize its institutions and jeopardize its investment grade status. The purge, which has affected the judiciary, the private sector, and even the central bank, has seen more than 60,000 individuals—including soldiers, judges, teachers, and journalists—suspended or detained over alleged connections to the U.S.-based cleric Fethullah Gulen, who is blamed for the coup attempt on July 15-16.

Initially focused on security services and the judiciary, the purges have now extended to commercial enterprises and financial institutions. For instance, the head of research at a major brokerage firm had his license revoked following his report analyzing the coup plot, and the CEO of Turkey’s largest petrochemical company was detained in connection with related events.

Turkish Airlines has dismissed 211 employees for alleged ties to Gulen’s movement, while sources within the central bank have indicated that purges of junior officials are also beginning there.

Manik Narain, a strategist at UBS in London, noted that foreign investors are apprehensive about how these purges will influence stability and confidence in business and investments in the near to medium term.

Government officials argue that the severity of the crackdown is justified, emphasizing the unprecedented nature of the violence during the coup attempt, which resulted in over 240 civilian fatalities.

However, in investment circles and among Western analysts, there are fears that President Tayyip Erdogan may be using the crisis to consolidate his power and diminish the already fragile independence of institutions like the judiciary and media.

On July 18, Moody’s announced it was reviewing Turkey’s credit rating for a potential downgrade to junk status, attributing this to the coup’s medium-term impact on the country’s policymaking institutions and economic growth.

Fitch has also stated that any downgrade will hinge on the government’s response and whether it exacerbates political divisions and undermines institutional independence. Meanwhile, Standard & Poor’s recently lowered Turkey’s unsolicited rating further into junk territory and assigned a negative outlook due to political uncertainties following the coup.

Currently, Turkey holds the lowest investment grade designation of BBB-/Baa3 from Fitch and Moody’s, which allows its bonds to be purchased by more conservative investment funds. Analysts at JP Morgan estimate that a downgrade to junk status by either rating agency could lead to around $10 billion in divestment from Turkish bonds.

To mitigate this, government officials have engaged in outreach efforts to reassure investors. Deputy Prime Minister Mehmet Simsek conducted conference calls to allay concerns, asserting that the failed coup could ultimately unify the nation and strengthen institutions.

However, he also acknowledged that the government would scrutinize all institutions, including the treasury and central bank, in its investigation into Gulen’s network.

Former central banker Ugur Gurses expressed concerns about the erosion of meritocracy and institutional integrity, stating the importance of how the government replaces purged personnel.

At a recent press conference, Central Bank Governor Murat Cetinkaya refrained from commenting on the purges within his institution but indicated that a statement might be forthcoming.

Although Simsek is seen as a stabilizing influence, questions arise about his authority following a reduction in his powers in a cabinet reshuffle. His attempts to calm the market may be undermined by actions taken by institutions operating under other members of the government.

The Capital Markets Board, which reports to a different deputy prime minister, revoked the license of the head of research at a brokerage firm over his analysis of the coup’s impact, citing failure to meet his responsibilities.

Analysts warn that such measures could foster self-censorship and reduce the necessary checks and balances within the system, further contributing to the institutional weakening that ratings agencies have cited.

In a positive development, Finance Minister Naci Agbal reported a constructive meeting with Moody’s, expressing confidence that the agency appreciates the government’s fiscal discipline and labeled S&P’s downgrade as premature.

Simsek has emphasized the need for actions that ensure ratings agencies do not make unfounded decisions, asserting there is no basis for downgrades. Cetinkaya also downplayed the impact of potential rating cuts, suggesting that ratings are not the sole factor influencing investment decisions.

Moody’s will reevaluate Turkey’s rating on August 5, while Fitch will follow suit on August 19.

As the political landscape continues to evolve, pressures remain high. While Turkey’s economic indicators might not justify a sub-investment grade rating, persuading the ratings agencies of the government’s commitment to upholding the rule of law and implementing promised reforms will be critical.

Analysts recognize that Moody’s sensitivity to political developments may affect Turkey’s rating, as the agency has maintained a negative outlook since April 2014, raising the risk of a downgrade.