The Turkish ratings comedy
I am blogging with the appetite of not having blogged for almost a full week, so this is my third post today.
I was originally planning to squeeze all the Turkish data and economic events into one post, but yesterday’s Standard and Poor’s, or S&P, credit ratings upgrade deserves a separate entry.
Let the the title not deceive you: I will not delve into whether or not the ratings upgrade was long overdue. But I am calling the process comedy because of what happened up to and following the ratings upgrade.
To kick off, the decision is not really a ratings upgrade, for two reasons: First, the upgrade is to Turkey’s “local” currency debt, not the “foreign” currency one that really matters.If you want to know the difference in detail, I am referring you to S&P’s own manual, compliments of Murat Ucer of Turkey Data Monitor.
Besides, according to S&P, the decision is mainly technical, because of a change in the ratings methodology that justifies a two-notch difference between the local and foreign currency ratings. The decision also reflects the country’s strong financials sectors and deepening of local markets.
Anyway, with foreigners already having increased their holdings of Turkish bonds significantly, and most eurobonds resting in Turkish banks’ vaults, the decision does not mean much in practice, either.
Having said this, a ratings upgrade, probably by year-end, to the foreign currency ratings is likely. For one thing, a friend who saw their unpublished Turkey forecasts was amazed by their bullishness.
And if nothing else, S&P opened shop in Istanbul yesterday, and to my knowledge, the agency is only present in investment-grade countries. But a friend who attended their presentation and cocktail party today told me that the S&P officials ignored this fact as mere coincidence.
Speaking of mere coincidences, the fact that the ratings upgrade came just before the opening of the Istanbul office is also a coincidence, at least according to officials from the ratings agency.
However, it seems S&P is still worried about the current account deficit and the accompanying external financing outlook, so the two notches to investment grade will take time.
I should also congratulate them for what I deem as a very smart move: They and the other ratings agencies were faced with growing criticism, both from Turkey economists and government officials, that Turkey deserved investment grade. They have managed to get rid of criticisms that would tarnish their grand opening with this investment grade upgrade which really isn’t an upgrade.
Finally, I would like to use this opportunity to note that a certain Turkey economist who goes by the name Brave Cloud (my second favorite Turkey economist, after Suluman the Economist), had announced some time ago that he had heard there would be a ratings upgrade soon. At the time, I was having beer with a friend from S&P in a pub near the Bank of England, but it never occurred to me to ask him about that- that’s why I will always stay as an ethical but poor economist:) And today Brave Cloud was showing off, openly claiming that he had “learned” that Turkey would get a ratings upgrade and that he had “confirmed” the upgrade would be soon. Since he is such a hotshot, I am sure he has more important things to do than read this blog, let alone answer my questions, but I was wondering if the Capital Markets Board would bother to ask him from whom he had learned and confirmed the upgrade.
Anyway, leaving cloudy matters aside, it is important to think about the monetary policy implications of the upgrade: The move has given the Central Bank yet another excuse for further monetary easing. The only thing that stands in the way is lira depreciation. Indeed, the CBT sold USD 350mn of FX on the day of the ratings upgrade, with demand at USD 850mn!
Speaking of the CBT, I have also learned that S&P talks with the Central Bank regularly. Hmmm, I thought that the CBT was not doing any more one-on-ones… I guess “all animals are equal, but some animals are more equal than others”….
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