In February, S&P Global Ratings had already certified the rating it had previously lowered. It had planned its next Turkey assessment on the calendar for August. Yet, it could not wait and with the arrival of May, it applied its decision to take action. Dropping Turkey’s credit rating another degree, it did, once more, what wasn’t its place to do.
The latest decision by S&P, whose Turkey approach has been obvious for years, is interesting especially in terms of its “rush” content. The institution is very well aware of this extraordinary peculiarity that it starts its press release with an explanation of this situation. Because, while according to regulations you cannot sway from the calendar when you feel like it, going against the arranged timing is possible under “limited conditions” only.
Hence, one cannot help but wonder which limited condition category Turkey’s economy fell into within a period of two months since the end of February. There has to be some kind of extraordinariness. Then, allow me to clarify my/our curiosity.
First, we are talking about a rating “change” here. I cannot be sure of S&P’s vocabulary, but in the dictionary, change is defined as taking another form, becoming different. Then, Turkey’s economy must have come to different places super-fast in late February from its appearance in the confirmed rating.
One other matter I am curious about is, what kind of critical developments could happen in a period as short as the three months left on the calendar that the situation required the urgency to not wait for the calendar and cut the rating?
What caused this?
Well, what does the non-standard decision say to satisfy our curiosity?
In its statement, S&P starts by talking about worsening in macro balances and talks about the deteriorating current deficit and financial balance, as well as high inflation.
If we need to start from the current balance, in this scope, we are all aware there was an increase in the deficit last year. Yet, we need to underline a matter here and make an assessment for it to be sound. And what may that be? It is the “gold” trigger that S&P avoided in its analysis.
As I wrote many times before, the greatest agent of the expansion of the current deficit in question is gold and, in addition to the normalization that is expected to come this year, it is going to be possible to ease the burden gradually. Of course, while in this context energy prices are going to be followed carefully at all times, and when we look at the non-gold core, there is no deterioration. And at this point, I seriously cannot see a concerning situation that has aggravated matters in the last two-month period or will do so in the next three months.
Misinformation and assumptions
As a matter of fact, we need to take into account that the tourism sector, to which I drew attention to in my previous article, is going to continue to increase its current surplus with its increasing revenues. Yet, at this point, S&P is strangely doom-mongering and saying: Turkey’s “security” determines this. In an atmosphere where our country overcame the terror atrocity it experienced in 2015 and 2016, and tourists clearly see this and flock to the country, this appears to us as an obviously speculative and bad-intentioned argument.
Meanwhile, even though it may not be obvious to S&P, the determination to pull the deficit to sustainable levels is obvious to us. Hence, investments in selected areas continue to be made and supported to lower our import dependency in the medium and long terms. The closest example to this is the project-based investments announced in early April that are encouraged.
In addition to this, one point that disconnects one from the incident comes into play in S&P’s statement in relation to this matter. Because, this institution appears to have misinterpreted the TL 135 billion, which is the total of the investments supported by the incentives in question. The reason for the decision to cut the rating, that takes the matter to the extent of disrupting the financial discipline with this misinterpretation, is based on an unsound basis by twisting the budget figures – like the calendar – that are doing quite well.
Also, while it is important to prevent the impact of the activity in the exchange rate, it appears the institution must have missed amid its rush, the foreign exchange borrowing regulation designed this year to reduce the risk of companies’ foreign exchange liabilities. Then, it is not possible to say that S&P correctly included Turkey’s foreign affairs in the equilibrium. As a matter of fact, it should be noted that it has ignored that the focus, post-election, will be on macroeconomic reforms.
As a result, such an unjust decision in a scenario that includes misinformation and assumptions, credit rating institutions have added another to their series of mistakes. There is actually a lot to say about its strange rating rush, but I have reached the limits of this article. Perhaps what needs to be said in brief is: It needs to be reminded that while the government is continuing to pursue its job-creating growth policy, it is never insensitive toward problems such as current deficit and inflation for a sustainable economic performance; on the contrary, it attaches importance to policies related to these matters. And, just as there has been no change in the last two months to necessitate bringing the calendar to an earlier date, it is clear that there will be no such change in the next three months either.
Of course, save for one exception: The snap election decision.