Moody’s has reminded us of the risks in the economy

In general, markets have a tendency to exaggerate both positive and negative atmospheres. The fact that domestic markets have a tendency to exaggerate the positive atmosphere surfaced the other day with the Moody’s statement.

With the effect of the recent positive atmosphere, markets that were expecting Moody’s to upgrade its outlook on Turkey to the level of “investable country,” just like Fitch, were severely upset when their expectation did not occur.

The stock exchange markets in particular were the categories that both exaggerated the positive atmosphere the most and also, when this expectation did not come true, the one that was the most upsetting. After a period of many long years, the Istanbul Stock Exchange (İMKB) national 100 index fell to such a ratio of 4.2 percent, reflecting the news.

Actually, the reasons the international rating agency Moody’s listed for not upgrading Turkey’s status should make us remember the forgotten risks of the Turkish economy.

We will soon see whether the markets will actually realize these risks and act accordingly or opt to not take these warnings too much into consideration.

Personally, I assume that, despite the risks listed, the markets will adopt a tendency to pick up on positive news again, consequently ignoring the risks and again keep on highlighting the good sides.

Whereas the risks that Moody’s listed as threatening factors in the next term, despite giving credit to the achievements the Turkish economy has recorded, are based on quite realistic analyses.

In its statement, Moody’s said in the case that Turkey’s external fragilities decrease, it would upgrade Turkey’s ratings. For this, it said, structural improvement in the current account deficit, increase in foreign currency reserves and a decrease in the private sector’s foreign debt were needed.

Because the fragilities it has listed are difficult to overcome, markets do not expect Moody’s to make this upgrade in the short term.

Central Bank’s stance
In summary, Moody’s is emphasizing that the fragilities of a foreign-dependent economy are continuing and that the outlook would be at risk if fund flow to Turkey stops or if the government is not able to lower the current account deficit structurally. Moody’s also highlighted political stability and said its growth expectation for 2013 was 3.8 percent and inflation expectation 5 percent. In other words, it is expecting minor deviations from program targets.

Despite these warnings from Moody’s, President of the Central Bank Erdem Başçı during the announcing of the Inflation Report yesterday, said, “What the rating agencies say should not be overestimated.” If Moody’s had upgraded our outlook as expected, would he have said the same thing? We do not know.

What is important is whether or not the risks Moody’s has listed exist.

I think the risks listed do exist. The Turkish economy was able to achieve balanced growth depending on foreign financing without going through a structural recovery. There is the probability of upsetting this financing through a possible external or internal effect. In case of the stopping of foreign financing, in other words in case the risks listed are experienced, the possibility of upsetting the balances achieved in the economy are pretty high.