Turkish Lira Flat After Crashing to Record Low on Credit Downgrade

The Turkish lira is trading relatively flat against the US dollar on Tuesday. The lira crashed to a record low on Monday after one of the world’s premier credit ratings agencies slapped Turkey with a credit downgrade and geopolitical tensions between Turkey and Greece escalate. After cratering to an all-time low this past spring, does this mean the lira can suffer another record low this year?

On Monday, Moody’s Investor Services downgraded Turkey’s credit rating from “B1” to “B2,” warning of a deeper financial crisis. The agency listed the country’s external vulnerabilities that could lead to a balance of payment calamity, adding that its fiscal tools are eroding.
The ratings group added that the central bank’s foreign exchange reserves compared to the gross domestic product are at their lowest levels in decades. The central bank has been doing everything to prop up the lira, including raiding its forex reserves, which presently stand at $44.8 billion, down from more than $80 billion at the start of 2020.
As a result, Moody’s cut is bringing Turkey’s sovereign rating closer to junk territory. Overall, Moody’s is maintaining a negative economic outlook.
President Recep Tayyip Erdogan dismissed the news, although he misdirected his attack on Standard and Poor’s. Erdogan stated in a speech:

S&P, get a grip on yourself. You cannot push Turkey around with economic sanctions. You did that before. Did you get a result? No, you didn’t. You won’t do in the future either.

On the data front, retail sales surged 9.5% in July, down from the 18% spike in June. The higher retail sales for the third consecutive month suggested that domestic demand is recovering. The Turkish economy reported gains in food and beverages, electronics, household goods, automotive fuel, and apparel.
In July, industrial production advanced at an annualized rate of 4.4%, beating the market forecast of 3%. This is also up from the tepid 0.4% jump in the previous month. Automobile output also skyrocketed 44.3% year-over-year last month, up from the 11.8% contraction in July.
The USD/TRY currency pair rose 0.05% to 7.4913, from an opening of 7.4881, at 19:23 GMT on Tuesday. The EUR/TRY dropped 0.06% to 8.8767, from an opening of 8.8828.
If you have any questions, comments, or opinions regarding the Turkish Lira, feel free to post them using the commentary form below.

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