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The Kapali Carsi

Turkey Zindabad or, ‘in the bag’: Is Turkey getting investment grade soon?

Happy families are all alike; every unhappy family is unhappy in its own way.

Here’s the intro. to my latest Hurriyet Daily News (HDN) column, where I use the Tolstoy analogy to discuss how Turkish upgrade rumors created an euphoric mood in markets last week, and whether those expectations are valid. Here is the summary of my idea:  There were a lot of data releases last week, most of which were mixed at best. But lifted by upgrade rumors, markets chose to ignore the negative news and concentrate on the positive.  Anyway, you can read the whole thing at the HDN website.

Due to space constraints, I could not mention all the econ. events/data releases of the week, but the ones I did not mention were also perceived in a rather rosy way.

One was IMF’s Article IV Concluding Statement. Although the media (and even most analysts, including RGE) concentrated on cherry-picking the fact that the Fund had increased their 2012 growth forecast, the short document did include some important yellow alerts: For one thing, the Fund feels the structure of public finances is not that good; they argue for consolidation over the medium term. They also continue to be skeptical on the effectiveness of  monetary policy even though the Central Bank added yet one tool to its arsenal. Finally, while acknowledging that the soft landing is proceeding, they are also urging the government not to loose preemptively and too much.

This last point is quite important. The lower-than-expected industrial production, along with rate cuts from Brazilian, Korean and Thai central banks, led to more pressure on the Central Bank (in Turkish) for rate cuts at today’s rate-setting meeting. While, I cover the details in my inaugural Friday column at HDN, the Bank only cut the ceiling of the interest corridor a further 50 (more or less as expected) bp, while at the same time shifting the Reserve Option Coefficients up (by 0.1) again. But as I mentioned earlier, a cut in the one-week repo rate is unlikely at this point, me believes…

Anyway, the other important release of the week not mentioned in the column was the Medium-Term Economic Program. Again, many hailed it as the government putting on the brakes despite sequential elections (local, presidential, national) for the next three years. On the contrary, I’d agree with Citi economists that the program is realistic but unambitious. Besides, I would not be surprised if these unambitious spending levels were breached, either…

And if you want to see the how Turkish markets have been behaving of late, here’s Turkish stocks compared to their EM peers:

As you can see, Turkish equities, after having underperformed other EMs for most of the year, have recently started doing better…

Finally, I have saved the best for the last: Will the country actually get the investment grade or not? I and my friends at RGE argue it should not, but that doesn’t mean it will not. In fact, my arguments got a serious blow on Monday! Just as my column hit the shelves (and the net), Fitch sent invitations to a conference titled Turkey Credit Outlook 2012, to be held in Istanbul on November 8. rekindling the upgrade-mania! It seems open to all who are interested, so have a look at the program and register online if you are interested.

Anyway, I don’t know about RGE, but that doesn’t change my opinion, at least in the near term. I think we are most likely to get an outlook upgrade, especially with the Syria s–t (pardon my French) going on next door. And if that is not convincing enough, Citi Turkey economists published a research note yesterday, probably in response to the upgrade-mania, where they used a probit model (determinants of ratings upgrades) to show that an upgrade is not in the bag at all.  And if you are still not convinced, HDN ran a piece, next to my column of all places:), discussing what an upgrade to investment grade would  bring.

And speaking of RGE, I was quite amused at the gentleman who asked the first question in the Q&A session of the conference call I mention in the column: He claimed that Turkey had high human capital, mentioning the number of universities in the country as evidence. Well, I have met students at those universities, during the World Bank consulting gig on higher education I coordinated a long time ago in a galaxy far away, who couldn’t write a one-page letter without less than an error per sentence, so don’t get me started on that. Of course, the country has high human capital for the finance sector or for a few foreign firms who hire top graduates of top universities with Harvard MBAs, but then there is also the other 99.99 percent! Anyway, the details are in the World Bank study if you are interested….

On a more general note, I think many people are ignoring the fact that CDSs take into account short-term macro and flow factors, whereas ratings look at more medium to long-run stuff. That makes sense, as the idea is not how the country is doing right now, but whether it can service its debt in the medium-term. Soooooo, it is in fact quite normal for some countries to have lower CDSs compared to their ratings and others higher. In Turkey’s case, it is the longer-term, structural factors, which figure in RGE’s analysis as well, that are holding the country back…

7 Responses to “Turkey Zindabad or, ‘in the bag’: Is Turkey getting investment grade soon?”

BurakOctober 19th, 2012 at 2:01 am

As always Mr Deliveli, interesting article. I can just imagine though if Turkeys credit rating does go up. Itll be perceived in most circles of Turkish media that we are pretty much AAA. Alternatively if down the road we get notched down say with external factors, unrest etc, our media will portray rating agencies as conspirators to Turkeys demise. We are a people of many things. But rational, cold, calm and collected we are not.

DiranMOctober 19th, 2012 at 10:38 am

Whatever the case, Turkey has been far more successful than Greece in economic growth and exports, showing the benefits of a free trade agreement with the EU but not full EU membership or putting itself into a deflationary spiral in the Eurozone. Of course, always plenty of challenges, but also a far more dynamic economy than Greece.

As a Greek, I would like to see improvement in Greece, but with the present failure path locked into a deflationary spiral on a borrowed currency and with an unsustainable debt load and with its zombie political leadership doubling down on policy failure; it is hard to be optimistic.

Emre Deliveli edeliveliOctober 19th, 2012 at 10:56 am

No offense but that sets the bar a bit low for Turkey:)Speaking of the EU: A Greek mayor visits a Spanish town, he sees wonderful town hall, and asks his Spanish counterpart how he afforded that. “You see that bridge?”, the Spaniard points to a bridge over the river. “We got EU funds to build a bridge with 6 lanes, but only built 2, used the rest for the town hall.”A few months later, it is the Spaniard's turn to visit his Greek counterpart. He sees an even more lavish town hall than his own, and can't help but ask his Greek counterpart how they afforded it. “Do you see this bridge?” says the Greek, pointing to the river next to the town. “But there is no bridge”, answers the Spaniard, surprised. “Exactly!…” is the Greek's answer…Joking aside, good luck! As your neighbor, I sincerely hope you pull through one way or another…Sent by BlackBerry Internet Service from Turkcell

DiranMOctober 19th, 2012 at 11:50 am

As London Mayor, Boris Johnson, said what was the point of the Greek emanicipation from the Sublime Porte if they are now willing vassals of the EU, trembling at every word of Angela Merkel….. In fact, the harsh truth is that Greece would be better off integrated with Turkey economically than involved in the EU. Tying Greece to total EU dependency was a huge mistake of the Greek political elite, who have no sense of business, finance or commerce..

Turkey produces better political leadership. We are more backwards in this respect with our stagnant Kocambasi-style family political system. Turkey has now surpassed Greece economically in every respect. It dealt with its IMF problems in a much more professional and effective way, which anyway was on a proper bi-lateral basis without EU meddling. Turkey has got a lot more flexibility outside the EU and Eurozone analagous to successful Western European countries, who have followed the same path.

Metin GunduzOctober 23rd, 2012 at 12:13 pm

Excessive Value appreciation of Turkish Lira and decrease competitiveness of Turkish Exporters and Turkish Labor ; as TCB President Erdem Başçı said in one of his interviews recently ‘ saving his ammunitions’ ; in other words Central Bank of Turkey will not hesitate to lower Policy Target Interest Rate ‘ 1 week Repo rate’ from the current % 5.75 , rather than ‘wasting time’ , child's play of stepwise lowering Upper Ceiling of interest rate corridor (which is EMPTY UPPER Interest rate CORRIDOR ANYWAY – upper interest corridor actually has no real transection for the last 2 months in reality – ) Turkish Central Bank actually ‘ shooting blank ‘ by doing so. And the last action of increasing Reserve Option Coefficients for the bank reserves and ‘ soaking up some foreign capital flow to the market . IMKB testing dangerously record speculative highs these days rather than real earning valuation based appreciation of stocks .

Metin GunduzOctober 23rd, 2012 at 12:13 pm

So the bottom line ; if Investment Grade Rating comes by early November , surely there will be Turkish Central Bank Policy Target Rate CUT DOWN from current high of % 5.75 (compared to recent similar emerging economies) in their first meeting at the Money Market Committee ( if not emergency meeting arranged ) . ( That -policy rate cut of big chunk- will definitely give sound message rather than ‘shooting blank’ with the ‘ceiling cut of interest corridor’ and ineffective ROC(Reserve Option Coefficient) incremental increase . Time will obviously tell .