The big anti-governmental protests in Turkey over the past week "become increasingly credit negative the more they intensify and the longer they continue," the rating agency said in a statement.
This is because they increase Turkey's vulnerability to pressure on the balance of payments as tourists avoid the country for fear of instability and portfolio capital inflows dwindle as uncertainty persists.
The protests could also hinder foreign direct investment (FDI) inflows, if they continue, Moody's said.
It said that the current level of risks were included in its rating and outlook. Moody's rates Turkey Baa3 with a stable outlook.
The protests started with a small group attempting to stop the demolition of a park in Istanbul but grew in size after police tried to clear the park of protesters by force, using tear gas.
Three people were killed and thousands were hurt in clashes between protestors and police over the past 10 days; various media reports put the number of people arrested at around 900.
Protesters are unhappy with what they see as Prime Minister Recep Tayyip Erdogan's autocratic tendencies and say he is encouraging an increasingly religious trend in a country with secular laws.
On Sunday, Erdogan gave a passionate speech to his supporters and warned the protestors – whom he called "a handful of looters" – that they should oppose him at the ballot box, not on the streets.
Moody's said that the protests serve as a reminder to investors of domestic political risk in the country, which could reduce the attractiveness of Turkey in the eyes of portfolio investors at a time when investors' appetite for emerging markets is weakening as speculation grows that the Federal Reserve will taper its quantitative easing programme.
"We currently consider Turkey’s susceptibility to economic event risk is high, precisely because of the vulnerabilities created by its reliance on highly liquid sources of current account financing," Sarah Carlson, vice president – senior credit officer at Moody's wrote in the statement.
In terms of FDI, although the effect of the protests is less clear cut, if political risks escalate this could diminish the benefit of progress made in some areas, Carlson warned.
Turkey has implemented structural and institutional reforms to become more attractive to foreign investors and its ranking in the World Economic Forum Global Competitiveness Report jumped by 16 places to 43rd place.
Carlson said that if political calm was to be restored quickly, the country's attractiveness as a destination for FDI was unlikely to suffer long-term damage as it has positive growth prospects, a strategic geographic position and improving investor climate.
She added that voters in Turkey have "ample opportunities" to express their dissatisfaction through voting as local elections are in March next year and presidential elections in August 2014. Parliamentary elections will be held in June 2015.
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