Two major credit rating agencies have downgraded their ratings for Turkey due to the country’s increasing financial stress and a’ perceived inadequate response from policymakers.

Moody’s has downgraded Turkey’s long-term issuer ratings to Ba3 from Ba2 and changed its rating outlook to negative, concluding the review for downgrade that was initiated on 1 June. The key driver was "...the continuing weakening of Turkey's public institutions and the related reduction in the predictability of Turkish policy making,” Moody’s says in a note.

“That weakening is exemplified by heightened concerns over the independence of the central bank, and by the lack of a clear and credible plan to address the underlying causes of the recent financial distress, notwithstanding recent statements by the government,” the agency continues. “The tighter financial conditions and weaker exchange rate, associated with high and rising external financing risks, are likely to fuel inflation further and undermine growth, and the risk of a balance of payments crisis continues to rise.”

The Turkish lira has lost some 40% of its value against the US dollar since the start of the year. Consumer price inflation reached 15.85% in July, up over 5 percentage points since the start of the year and the highest inflation rate since December 2003.

“While Turkish banks have so far managed to maintain access to the international inter-bank markets for funding, the tightening financing conditions and the weakening lira will further increase pressure on domestic borrowers with foreign-currency debt,” Moody’s says.