The Turkish ratings comedy
Ratings agency Standard and Poor’s, or S&P, increased its Turkey rating up one notch to BBB- shortly after the Central Bank’s Monetary Policy Committee meeting on Tuesday.
That would have made Turkey investment-grade, except that the upgrade is to the local currency rating, whereas the more important foreign currency rating remained at BB, two notches below investment grade.
Besides, the move seems largely technical. According to S&P’s own manual, “gaps (between local and foreign currency ratings) are assigned to sovereigns in countries with more developed or developing local capital markets that provide long-term local currency financing.” Other than the deepening of financial markets, S&P also emphasized the country’s strong banks.
But this is a very smart move by S&P. The ratings agencies have been subject to growing criticism for denying Turkey investment grade, so the move not only prevented nasty party-spoilers before the ratings agency’s Istanbul office opening, but also provided nice advertisement. By the way, S&P notes that it is pure coincidence that the two coincided.
It is also likely that there will be a one notch foreign currency rating upgrade within a year. For one thing, S&P is only present in investment-grade countries, which is also pure coincidence, according to the ratings agency.
Moreover, S&P’s Turkey forecasts are bullish: While this year’s growth and current account forecasts of 6 and 10.2 percent are pretty standard, they expect a sharp improvement in the current account deficit in 2012, falling to 5.3 percent on the back of strong exports. Growth is expected to slow to 2 percent.
However, I do not expect investment grade to come soon. Despite this rosy picture, S&P is still worried about the current account deficit and the accompanying external financing outlook.
But the most interesting part of the upgrade was that certain columnists, with names such as “Brave Cloud,” “Lightning Riches,” “Celestial Sea” and “Unyielding Secret” that would make Kevin Costner jealous, were writing about it several days or even weeks before it.
I should congratulate them on their foresight, especially since my own track record is so weak, but one has openly admitted to learning about the upgrade and then confirming it would be soon. Being such a hotshot, I doubt he would read my columns, let alone address my questions, but he could answer to Capital Markets Board president Vedat Akgiray on his sources.
Leaving such “cloudy” matters aside, this upgrade is likely to have monetary policy implications. The Central Bank has been handed on a silver plate another excuse to cut rates or reserve requirement ratios.
Unfortunately, the Turkish Lira, which almost touched 1.85 against the dollar on Friday, is standing firmly in the way. Incidentally, if the weak lira will only increase inflation temporarily, as the Bank claims in its one-pager following Tuesday’s rates decision, I wonder why they sold $350 million of foreign currency at Tuesday’s auction, with demand at $850 million.
In this respect, I find it quite entertaining that an artificial ratings upgrade did what the Bank has been striving for: Strengthen the lira, albeit only briefly.
*Emre Deliveli is a freelance consultant and contributor to Roubini Global Economics. Follow his blog, the Kapalı Çarşı, at www.economonitor.com/emredeliveli/.
