Nothing standard or poor about S&P’s Turkey decision

The decision of credit rating agency (CRA) Standard and Poor’s to downgrade its local currency ratings on Turkey on the evening of May 8 made me wish Admiral Zafer “Patek Philippe” Çağlayan was still the Economy Minister.

Çağlayan, who had to resign after the graft scandal, loved wordplays on the names of CRAs. After a decision by Fitch that he did not particularly like, he said that the rating agency had done “its Fitch thing” again, implicitly referring to a well-known Turkish swearword that sounds like “pitch” in English. He may have found this latest decision “standard and poor.”

Or he could have chosen to keep quiet. After all, local currency ratings are not as important as foreign currency ratings. Moreover, the latter are rated one notch above investment grade by S&P’s competitors Moody’s and Fitch. A country needs to be rated investment grade (IG) or above by at least two CRAs in order to be deemed IG by funds, so Turkish officials probably did not lose any sleep over S&P’s decision.

Regardless, the short note accompanying the announcement makes three important points: First, S&P has based the ratings cut on what it “consider[s] to be increasing curbs on the operational independence of Turkey’s central bank, which in [its] opinion have made it more challenging for the monetary authority to credibly fulfill its price stability mandate and to dampen the impact of exchange rate volatility on the economy’s growth prospects.”

S&P is also warning about the rise in foreign currency (FX) deposits. According to the latest data, FX deposits rose more than $4 billion during the last week of April after hovering around $138 billion for several weeks. Dollarization decreases the effectiveness of monetary policy, which, along with “the challenged credibility of the Central Bank, has diminished the status of the Turkish lira as a reliable transactional currency.” S&P thinks that “this poses greater risks to the refinancing of Turkey’s considerable stock of external debt.”


I should add that the recent bout of FX hoarding occurred despite a weakening lira. In the past, depositors would see a depreciating lira as an opportunity to sell dollars, which would in turn ease off depreciation pressures. However, they would not do that if they expected the lira to continue to weaken, which may as well have been what was going through their minds during the last week of April.

Finally, it is very easy to miss it, but S&P expects Turkish growth to be 3 percent on average from 2015 through 2018. I took this to mean that they too have figured out the unsustainability of the Turkish growth model based on external capital inflows. As I have noted before, such a growth rate, in turn, would not be able to keep unemployment at bay.

I would not expect any action from Moody’s or Fitch until sometime after the elections. They would want to see the new political and economic landscape first - especially whether the Central Bank will stay independent, at least on paper, and who will replace economy tsar Ali Babacan. But I am sure that the points raised by S&P are on their radars as well.

So it may not be long before the new boss of the economy, whether he be President Recep Tayyip Erdoğan’s son-in-law Berat Albayrak, his adviser Brave Cloud (Yiğit Bulut), former Borsa Istanbul head İbrahim Turhan, or some other name, starts lamenting that CRAs are “moody.”