A standard and poor decision on Turkey – NOT!


First, some people are arguing that there is a political element to all this.

Author: Emre Delivel


Here’s the link to my latest Hurriyet Daily News (HDN) column, where I discuss S&P’s Turkey outlook downgrade. As usual, I have a few additional points to make:

You may remember that Turkey got the coveted second investment grade the same day Prime Minister Recep Tayyip Erdogan met with U.S. President Barrack Obama. Garanti Bank’s Head of Research Ali Ihsan Gelberi had made that prediction several months before the decision, and so I wrote about that in my eulogy to him when he unexpectedly passed away in October. So what happened this time? The U.S. Treasury was very critical of Turkey for evading sanctions on Iran. Conspiracy theories have kindled because of the timing of the decision. Erste Securities notes: “Turkey’s ratings are subject to certain publication restrictions as defined by the EU and normally the rating actions should come in a pre-scheduled calendar. Otherwise, agencies should explain in detail their rationale. Note that S&P’s outlook downgrade was not a pre-scheduled review and was therefore a surprising move.”

If you ask my opinion, I would give more credence to the “piper” (see the column) than “political pressure” theory. Speaking of that, do you know how the Treasury dropped S&P? They need only two of the top three to rate them, and they replaced S&P with Fitch in January 2013- soon after Erdogan spoke very critical of the former. So Fitch and Moody’s are likely to think twice before being too critical of the Turkish economy:)

Speaking of the credit rating agencies, both Moody’s and Fitch actually spoke on the Turkish economy recently. They both more or less said the same thing: That the rate hike would relieve pressure on the lira but slow the economy down further- in line with what I wrote. In addition, Moody’s published a report on Feb. 6 that labeled Turkey and South Africa as the countries most vulnerable to the Fed’s tapering. Just as I was finishing up this post, they had another report come out, with the title “QE tapering could further weaken liquidity of some EMEA emerging market companies.” They think companies in South Africa and Turkey could be at most risk. Ssshhhhh:)…

Moving on, let me explain why I found S&P’s current account forecast of 2.9 percent of GDP a bit optimistic. They probably looked at the relationship between capital flows or the current account deficit and growth. Since Turkey cannot grow without external financing, there is a strong relationship, but as you can see in the graph below, the current account deficit seems to have hit a new plateau.

Turkey would probably end the year with a higher deficit, in the vicinity of 4-5 percent, if growth indeed turned out to be 2.4 percent, as S&P is forecasting- BTW, that is quite a logical projection, but if the deficit is indeed 2.9 percent, we would probably end up with lower growth… For the wonkish, you cannot catch structural breaks with such short-length macro data. That’s actually what I am saying here; I just cannot back it up, other than with graphic observation. But I am not the only one who found S&P’s macro forecasts inconsistent. Here’s my friend Ozlem Derici, chief economist of Deniz Invest: “Though we also believe that further tightening in external financing conditions may end up with a lower GDP growth than our current estimate of 2%, we find the S&P’s projections for 2014 somewhat inconsistent with 2.4% GDP growth, 9.8% CPI inflation and 2.9% current account deficit to GDP.”

Last but not the least, since the S&P decision came Friday night and many regular columnists don’t write on Sundays, I haven’t see a lot of opeds I could recommend (in case you want a different opinion than mine). One notable exception is fellow Daily News columnist Guven Sak. Writing in today’s Dunya (business daily in Turkish), he manages to go a step further than me: He argues that, without the Central Bank’s rate hike, we could have ended with an outright downgrade! But considering that I recently argued that the Central Bank prevented a crisis (and saved Erdogan’s ass) with the rate decision, I think I should be agreeing with him:)….

Happy time, Chenqui!

P.S. Those of you who are thinking that I have finally gone completely nuts and am talking gibberish (I actually started talking elven with some friends over at Facebook Saturday morning, and they thought exactly that), here’s a useful hyperlink. And I guess now you know where I got the inspiration for the title 🙂 And while I am at it, let me give you a couple of examples of NOT jokes:Turkish PM Recep Tayyip Erdogan is very tolerant and democratic– NOT!The graft scandal is a conspiracy against Erdogan and his Justice and Development Party (AKP)– NOT!I think you get the idea!🙂