Moody’s credit rating has downgraded Turkey amid worries that the authoritarian government of Recep Tayyip Erdoğan is headed towards a default due to a balance of payment risks.

Moody’s has followed the lead of Standard & Poor’s and (B+) and Fitch Rating (BB) in downgrading Turkey’s sovereign risk profile, which is rapidly sliding further into “junk” territory. By downgraded Turkey’s long-term debt rating from Baa3 to B1, this now puts mounting pressure on the Turkish national currency, the lira. Turkey’s debt is now well below investment grade, which means that international institutional investors – from pension funds to banks – will now stay clear of its government and corporate bonds.

Moody’s cited “an erosion of institutional strength and policy effectiveness on investor confidence” as the main reason for its decision, pointing to major “government intervention in monetary policy and, more broadly, corporate governance”. Though the agency acknowledged that the Turkish economy has shown resilience in the past due to its diversified economy and relatively low-level government debt, the concern now is that the country remains dependent on external capital inflow, which leaves Turkey vulnerable to economic and financial volatility.

The Turkish finance ministry, as has become the norm during Erdoğan ‘s 16-year-rule, lambasted Moody’s decision saying it “does not conform with the Turkish economy’s fundamental indicators and thus creates question marks about the objectivity and impartiality of the institution’s analyses.”

incoming data, however, leaves little room for either optimism or debate. High inflation, rising unemployment, pervasive consumer pessimism and systemic currency weakness suggests that the economy is in a tough spot. Independent market analysts now expect the economy to contract this due to collapsing domestic demand which has been induced by high inflation, unemployment, and an increasingly weak lira.