Junking Turkey

Everyone agrees that if the coup attempt on July 15 had succeeded, Turkey’s economy would have gone into a tailspin. The steps taken by the government under its “emergency rule,” however, also appear to be achieving the same result. 

Here are some headlines taken from yesterday after Moody’s cut Turkey’s sovereign credit rating to “junk”: 
“Moody’s Cut Spurs Worst Rout for Turkey Assets since Failed Coup.” Bloomberg.

“Turkey Eurobonds tumble after Moody’s cut to ‘junk.’ Reuters. 

“Turkish Lira weakens to 2.99 against dollar after Turkey cut to junk.” Business Recorder.

The government continues, nevertheless, to be in denial. It only sees yet another international conspiracy aimed at undermining Turkey. Despite such headlines, which should make it concerned, it is not willing to give the slightest thought to the possibility that domestic factors may be behind the Moody’s rating downgrade. 

Prime Minister Binali Yıldırım believes that the Moody’s decision, which follows a similar decision by Standard and Poor’s after the failed coup attempt, is not based solely on economic factors. What he is implying is that this is a politically motivated decision. 

It is, however, stating the obvious to say there are political factors behind Moody’s decision. Political uncertainty in Turkey is on the rise, and it is not just rating agencies and investors who are worried, but anyone who has any stake in the country.

We can also turn Yıldırım’s explanation around and apply it to President Recep Tayyip Erdoğan’s approach to economics. It is clear to many analysts that Erdoğan’s approach is not based on economic realities, but on political considerations.

Erdoğan is demanding that the Central Bank reduce interest rates in order to boost investments. He even questioned former Central Bank Governor Erdem Başcı’s loyalty to Turkey for not doing so. The current governor Murat Çetinkaya is trying, but even he can only do so much to please Erdoğan in the face of economic realities. 

Erdoğan wants people to be able to borrow more at lower rates and spend more in order to stimulate production and spur growth through spending. He wants this because the illusion that people are able to get what they want will bolster the impression that all is well with the economy, which he relies on for political support.

However, he conveniently overlooks the fact that millions of people are already defaulting on their credit card debts or being crushed under loans they took out to buy their cars or houses, believing that the economy is under control. 

Erdoğan still has one advantage if we are to believe Jonathan Friedman, a London-based analyst at Stroz Friedberg. Friedman told the Financial Times that foreign investors are worried about risks in emerging markets but have few options. 

“The other big emerging markets — Russia, Brazil, Iran — pose even greater challenges due to a mix of sanctions, recessions and political paralysis. So investors realize that Turkey is going through a tough time. But they look at the size of its consumer market, and it remains attractive,” Friedman said. 

But Turkey’s problem is embedded in these words. If the current negative political trends continue, the country risks losing its “best among the worst” status. It is also true that Turkey’s consumer market remains attractive, as Friedman says, but how long will this last before an increasing number of Turks fail to meet their financial obligations as wage increases lag behind price hikes?

All eyes are now on the rating to be given by Fitch in early 2017. If that is also negative then Turkey’s junk rating will be consolidated. Considering its usual approach to solving political crises, early 2017 is still eons away for the government - even if it is only a few months down the line.

Put plainly, this means there is time for things to be made worse before they can get better. Meanwhile, sensible Turks are defying Erdoğan and are saving rather than spending - because they don’t know what comes next.