A standard and poor decision - NOT!
It is these moments when I really miss former Economy Minister Zafer Çağlayan, affectionately known as the Admiral, who was forced to resign by Prime Minister Recep Tayyip Erdoğan at the end of December.
Çağlayan used to show his criticism of the credit rating agencies with wordplays. For example, when Fitch issued a warning on Turkey’s current account deficit in July 2011, he responded by saying that Fitch had done the Fitch thing again, invoking a similar-sounding Turkish swear-word. If he were still around, he could have called the Standard and Poor’s announcement on Feb. 7 to downgrade Turkey’s sovereign credit rating outlook to negative a standard and poor decision. The Parliament website states that he “knows English,” just like Erdoğan.
I don’t know about standard, but the decision is NOT poor at all. The outlook revision reflects two emerging risks to S&P’s ratings on Turkey. First, the rating agency believes that “Turkey’s fiscal and monetary policies have exposed the country to a potential hard landing as external conditions tighten.” Second, S&P notes the “erosion of institutional checks and balances and governance standards,” giving “constraints on the independence and transparency of the Central Bank of Turkey” as an example.
That’s what happens if you shake the country’s legal system. And although economy tsar Ali Babacan and his sidekick Finance Minister Mehmet “Nominal” Şimşek have been emphasizing the Central Bank’s independence whenever they speak, Economy Minister Nihat Zeybekçi, who has made a habit of poking his nose into monetary policy, said that the rate hike was temporary on Feb. 1. Numan Kurtulmuş, who some claim was brought in to be Erdoğan’s Medvedev, hinted that the Bank’s Law could be changed a few hours before S&P’s announcement.
I thought the rest of the report was well-written as well. I was pleased to read that S&P has not been deceived by Babacan and Şimşek’s attempts at discounting the risk in foreign currency debt and open positions. They have also taken their place among the few Turkey economists who correctly argue that the fiscal stance has not been tight- despite the impressive headline figures. I only find their current account deficit forecast of 2.9 percent of GDP too optimistic.
S&P’s negative outlook means that there is at least a one-in-three chance that the agency will lower its ratings on Turkey, currently one notch below investment grade, in the next 12 months. The question is whether Moody’s and Fitch, the other two major agencies, will follow suit. Their reassessments are scheduled for April 4 and 11 respectively. But unless the Turkish economy deteriorates considerably, I do not expect more than an outlook downgrade.
Not because I believe in the resilience of the economy. Unlike S&P, Moody’s and Fitch get paid by the Turkish Treasury to rate the country, and he who pays the piper calls the tune. By the way, what happened to all that talk on reforming the credit rating agencies?