Moody's rating agency on Friday downgraded its outlook on Turkey to "negative", putting the country's investment-grade rating at risk, saying political uncertainty was affecting investor confidence and casting doubt over further reforms.
The agency re-affirmed the country's current bond rating of Baa3, just one step above a so-called 'junk' level, which is out of bounds for many pension and savings funds seeking safer investments.
The move piles more pressure on Prime Minister Recep Tayyip Erdogan, who has made a turnaround in Turkey's economic fortunes a keystone of his 11-year rule.
Turkey's strongman has faced increasing pressure for nearly a year, after huge demonstrations against his rule, which critics say has grown increasingly authoritarian, erupted in the country in June 2013, sparked by re-development plans for a green space in Istanbul.
Months later, the government found itself embroiled in a major graft probe targeting the prime minister's inner circle.
Nevertheless, Erdogan emerged triumphant in March 30 local polls, with his ruling Islamic-rooted Justice and Development Party (AKP) sweeping the election. The turmoil put pressure on the national currency, with the lira losing over 10 percent in two months before the central bank hiked interest rates in late January to stem the pressure.
In reaction to Moody's announcement, the lira dipped to 0.4727 against the dollar compared to 0.4768 late Thursday.
The Istanbul stock exchange was also down by 0.83 percent at 72,540.19 points.
Turkey's economy grew by 4.0 percent in 2013, but analysts warn of a slowdown after months of turmoil and ahead of presidential elections in August.
Moody's said that despite Erdogan's election triumph, political tensions will persist through the second quarter of 2015 when parliamentary polls are due, and will weaken the country's external financing position and medium-term growth prospects.
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