Turkey’s credit rating has been cut deeper into junk territory by Moody’s Investors Services, with the agency citing its high reliance on external capital flows and rising risk of government default as reasons for the downgrade.

Moody’s cut the country’s long-term debt rating by one notch to B1 from Baa3 and maintained a negative outlook, with the announcement late on Friday prompting a bout of choppiness in the Turkey’s currency, the lira.

The downgrade brings Moody’s in line with Standard & Poor’s rating of B+, which is four notches below investment grade. Fitch’s rating of BB is two notches below investment grade.

Moody’s said the “continued erosion in institutional strength and policy effectiveness on investor confidence” was outweighing positives such as Turkey’s diversified economy and low level of government debt. The inability of political authorities to implement a plan to support the economy remains a key concern.

“Turkey is structurally highly reliant on external capital flows, and Moody’s confidence in its ability to continue to attract the large sums needed each year to repay debt and sustain growth is waning”, the agency said.

“It remains highly vulnerable to a further prolonged period of acute economic and financial volatility. Foreign exchange reserve buffers are weak and Moody’s expects them to weaken further over the next two years relative to economy-wide short-term liabilities.”

The downgrade comes ahead of Istanbul’s mayoral elections on June 23.

The lira briefly weakened following Moody’s statement, but recovered to trade roughly where it was beforehand, and remained 0.1 per cent firmer for the session at 5.9005 lira to the dollar.