Moody’s Warns Political Risks Threaten Turkey’s Economic Gains

Credit rating agency Moody’s Investors Service has warned that rising political tensions in Turkey risk undermining the country’s recent economic progress, as a renewed judicial campaign targeting the main opposition party rattles investor confidence and complicates monetary policy.

Speaking at an Islamic finance conference in Istanbul, Alexander Perjessy, senior vice president and lead analyst for Turkey at Moody’s, said: “Turkey’s credit profile has improved significantly over the past two and a half years, but the positive momentum has now reached a plateau.”

Tensions have intensified this year as Turkish authorities escalate legal action against the opposition Republican People’s Party (CHP). Several senior figures, including Istanbul Mayor Ekrem İmamoğlu, have been detained or investigated, while a court hearing scheduled for Friday could threaten the party’s standing and potentially unseat its leader.

Perjessy warned that “political noise, including public protests, has historically undermined investor confidence in Turkey,” leading to lira depreciation and making it harder for the central bank to execute monetary policy effectively.

A renewed bout of instability, he said, could erode recent macroeconomic stability gains achieved under more conventional monetary management.

Maintaining the lira’s stability remains a key priority for policymakers seeking to prevent a shift toward dollarization, the tendency of investors and consumers to move assets into U.S. dollars amid domestic uncertainty.

Analysts fear that Friday’s court decision could trigger another wave of selling across Turkish equity and bond markets, compounding volatility already seen in recent weeks.

Moody’s has upgraded Turkey’s sovereign credit rating three times over the past 18 months, citing improved policy management and a return to orthodoxy after years of unorthodox monetary experimentation. However, inflation remains persistently high, recording its first monthly acceleration in more than a year in September.

Perjessy noted that core inflation has been stuck at roughly 2% month-on-month, reflecting sustained domestic demand and strong consumer lending growth.

“Breaking out of this inflation inertia will likely require a much deeper economic slowdown,” he said. “Experience from other countries shows that a decisive disinflation process often comes at the cost of weaker growth.”

Markets expect the Central Bank of Turkey to continue its rate-cutting cycle at its upcoming meeting on Thursday, though economists are divided on the size of the move amid rising prices and political risk.

For now, Turkey’s challenge lies in maintaining investor trust and macroeconomic discipline at a time when politics once again threatens to overshadow policy, a reminder, analysts say, that in Turkey, economics and politics are rarely separate.