Moody’s Ratings has cautioned that growing political tensions in Turkey could undermine the economic stability achieved since the government’s return to orthodox monetary policies over two years ago, Bloomberg reported.
Alexander Perjessy, vice president and senior credit officer at Moody’s Investors Service, said during an Islamic finance conference in İstanbul this week that Turkey’s credit outlook had improved notably over the past two-and-a-half years but that progress had now stalled. “The credit-positive momentum has reached a plateau,” he said.
Moody’s warning comes at a time of heightened political tensions in Turkey, where the country’s main opposition Republican People’s Party (CHP) has been the subject of a crackdown for about a year, which resulted in the arrest of the party’s popular İstanbul Mayor Ekrem İmamoğlu in March.
In addition to İmamoğlu, more than 10 CHP mayors and around 500 party officials have been detained or put in pretrial detention so far on a variety of charges that include corruption, terrorism and forming a criminal organization, seen by many as politically motivated.
İmamoğlu, considered President Recep Tayyip Erdoğan’s most powerful political rival, was named in March as his party’s presidential candidate for the next election scheduled for 2028.
A court ruling expected Friday could also further weaken the party’s position, putting its chairman Özgür Özel’s parliamentary seat at risk.
“Political tensions are threatening to reverse some of the gains in macro stability,” Perjessy said, adding that protests and political turmoil have historically undermined investor confidence in Turkey, weakening the lira and complicating the central bank’s monetary policy.
Maintaining stability in the local currency, he said, is crucial to preventing renewed dollarization, the shift of savings to foreign currencies. Analysts warn that the upcoming court decision could trigger volatility in Turkish markets, including equities and bonds.
Moody’s has raised Turkey’s sovereign credit rating three times over the past 18 months, citing stronger policy management and efforts to normalize the economy. Yet inflation remains a persistent challenge. Official data showed prices rising faster in September, marking the first monthly acceleration in more than a year.
Perjessy noted that robust consumer demand and rapid growth in credit continue to fuel price pressures. “Core inflation has been stuck at around 2 percent on a monthly basis for quite some time. This is one of the reasons inflation isn’t coming down as fast as the central bank would hope,” he said.
Despite renewed inflationary pressures and political uncertainty, Turkey’s central bank lowered its benchmark interest rate by 100 basis points to 39.5 percent on Thursday, marking another step in its gradual monetary easing cycle.
It was the third time in a row that the bank has lowered the benchmark rate, but policymakers slowed the pace of easing after a 250-basis-point cut delivered in September.
Perjessy added that bringing inflation under control may require a sharper slowdown in economic activity. “Elsewhere, we’ve seen that breaking inflation momentum often comes only after more pronounced economic pain,” he said.