EMRE DELİVELİ >A very standard and poor reaction

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That’sexactly how I felt about thegovernment’s response to the rating agency Standard and Poor’s (S&P) downgradeof Turkey’ssovereign credit outlook from positive to stable.

EconomyMinister Zafer Çağlayan opened the show, but it was Prime Minister Recep TayyipErdoğan who stole it with amusing comments I summarize at my blog. The less temperamentalFinance Minister Mehmet Şimşek decided to engage in a more scientific debate byquestioning the agency’s debt figures, and S&P issued a note toclarify. He also emphasized that Turkey’s debt was lower than severalcrisis-stricken countries rated above Turkey.

Butdebt is only one of the variables S&P bases its decision on. There is alsothe current account deficit, and although the Central Bank is claiming otherwise,neither the quantity nor the quality of its financing is improving. Foreigndirect investment has crept up because of one-off deals, and corporateborrowing is improving after negative figures during the crisis, but fickleportfolio flows still make up a sizable share of the capital account. And ifcapital flows are abundant, as the Bank hopes, the economy will become yet morevulnerable to a reversal, as S&P underlines.



In a videoreleased along with the decision, primary Turkey credit analyst Eileen Zhangnotes that they also look at per capita income. Turkey’s GDP per person is halfof Portugal’s and one third of Italy’s, as reflected by lowproductivity and women’slabor force participation. That’s why Royal Bank of Scotland’s TimAsh suggests that Turkey’s willingness to pay its debts, i.e. its trackrecord, should be taken into consideration, implying a change to the agency’smethodology.

Manywere also surprised because the S&P announcement came right after Marchtrade figures hinted that the long-awaited current account adjustment hadbegun. But as I argue in myblog, those figures may be deceptive. Besides, “less-buoyant external demandand worsening terms of trade could inhibit Turkey's economic rebalancing”, asS&P notes.

Duringa phone chat on Friday, Zhang explained this statement, citing globalliquidity, external demand and oil prices as the key risks in the next 12months. S&P has decreased their 2012 growth forecast for the Eurozone from 0.4 percent inDecember of last year to no growth in April.These more pessimistic projections are undoubtedly having an effect on Turkey'soutlook.

Zhangis actually more optimistic on the Turkish economy than me: She also noted that“Turkey was doing relative well on policy effectiveness, moderate indebtednessand monetarypolicy flexibility”, which “give Turkey the fiscal space and flexibility todeal with potential external shocks”.

Besides,the Turkish fury to the downgrade was really much ado about nothing. Zhangunderlined that Turkey was one of the last European countries to lose thepositive outlook. Although I did not pursue this with her, the decision mayhave been technical: A positive outlook would have meant the possibility of aratings upgrade in the near future, which is not realistic given the globaluncertainties and Turkey’s own vulnerabilities.

Butthen again, we are a temperamental bunch.


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