The plus and minuses of Turkey's reconciliation with rating agencies
A truce may be on the cards for Turkey. Not with neighbouring Cyprus – with which it reignited a row over offshore gas this week – but with Standard & Poor’s, which decided to raise Ankara’s credit rating last Wednesday. The agency had stopped its full rating service for Turkey in January, after a spat with its prime minister over a negative report last year; it is now bringing the country one notch below investment grade.
S&P had good reasons to be more lenient on Turkey. During 2012, its current account deficit fell four percentage points to 6% of GDP, on the back of a rebound in exports and slowing domestic demand. Growth decelerated from 8.5% to 2.5%, enough for the economy to cool down from its inflationary heights without undermining Ankara’s fiscal performance. And the country continues to boast strong demographics, a flexible exchange rate regime, and well-capitalised banks.
With Fitch giving Ankara the sought-after palm last year, and Moody’s just one step away from doing so, Turkey is now tantalisingly close to getting its second investment grade. That matters a lot – and not only for the country’s ego. Having the ranking shared by two out of the three big agencies would allow Turkey to attract large inflows of capital from institutional investors, many of whom can only purchase investment-grade assets. Oyak Securities, a Turkish broker, reckons the kitty could be worth $100bn in new money over the next ten years.
But another upgrade would likely come with its own problems. Easier access to foreign and domestic borrowing could lead to higher indebtedness in the private sector, which some analysts believe is already leveraging up at a rapid pace. Large inflows of capital could also push the value of the lira drastically upward, making exports uncompetitive and giving a boost to imports. Both could lead the current account deficit to return to unsustainable levels; and as domestic demand picks up, inflation could once again accelerate.
Turkey has a number of options to mitigate these risks. It could do more to encourage domestic savings, to reduce Ankara’s dependence on short-term inflows from abroad. Cutting down on red tape would also allow its businesses to become more competitive, which would help re-equilibrate its trade balance. Its central bank could take measures to increase hard currency reserves, and the government strive to make more savings, so that the country becomes less vulnerable to the ebb and flow of foreign investment.
Sadly enough, appetite for this sort of policies looks so far limited. But Turkey should bear in mind the example of Indonesia, which achieved the coveted rating in early 2012 – only to see many investors taking the door later in the year over resurgent economic worries. That’s not to say, of course, that Turkey shouldn’t be making new friends among rating agencies. But the prospect of an upgrade shouldn’t detract the country from keeping on fighting its well-known enemies.