Rating upgrades and hot money debates

The topic of hot money has been one of the most debated topics along with the subject of current account deficits, in regards to the Turkish economy. Such debates are expected to be rekindled in the coming days in tandem with an upgrade in ratings.

It has been anticipated for almost one month now that a financial ratings agency will upgrade Turkey to “investable country” status before a conference held on Nov. 8 in Istanbul. Alongside these rumors, we have seen the Turkish Lira gaining value, interest rates falling and serious hikes in share prices. The reason is obvious – when Turkey is upgraded to investable country status, an influx of financial flow is expected. Markets have reflected this expectation.

It is not yet known whether this rating agency will increase points or simply upgrade the “steady” status it had previously labeled Turkey last year to “positive” once again.

Suppose it upgrades the points from “steady” to “investable country” level in a surprise move, which market experts say is unusual but possible.

In this case, there would actually be rush of hot money into the country, but if you ask whether prices would climb too high, I don’t personally expect major increases. Let’s not forget that for the past month this expectation has already been assumed and prices have increased as if the rating upgrade has already taken place.

Even if the points reach the stage of investable country status, an immediate boom in the flow of hot money should not be expected. Turkey is already a preferable country for hot money in terms of rates of return and even if the points are increased, a sudden influx in financial flows is unlikely.

The importance of balances
With this rating change expectation, many are looking to developments experienced in countries whose ratings were upgraded to investable country levels and how much inflow occurred and at what stage. In light of these observations, some expect that “the Turkish economy will fly.” If this atmosphere continues to prevail, we can even face a risk of market disruption despite having been upgraded to an investable country.

I think it is extremely beneficial to debate, on a scientific level, Turkey’s experiment with hot money before this rating change and what might occur after it, taking into consideration the country’s medium-long term macroeconomic balances.

This topic was especially emphasized in Turkey’s concluding statement at the IMF Mission for the 2012 Article IV Consultation. It stated that Turkey continues to face some considerable risks given the large current account deficit and the volatile nature of global capital flows in an uncertain external environment. In this context, it stressed that in the case of a resurgence of excessive credit growth in Turkey driven by ample short-term external financing, there was a risk of halting – and even reversing – the unwinding of imbalances.

In other words, we have been told “not to grow excessively with hot money.” This is the fundamental reality of the economy regardless of a decrease or increase in ratings.