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Confidence Crisis

Why is Turkey Planning to Create its Own Credit Rating Agency?

20 مارس، 2018


Turkey recently announced plans to create its own credit rating agency, driven by a long-standing complain about international rating agencies, which downgraded the country’s rating more than once in the past two years. The downgrade prompted Turkey to issue strong criticism of the international agencies claiming their rating of its economy are unfair, politicized and unrealistic.  

However, such a step may not achieve prominent economic results, especially because international agencies are largely globally trusted and their ratings match the outlook of international institutions, such as the International Monetary Fund. Additionally, building an international reputation and legacy for the local agency would take a long time and the agency will always be accused of a lack of impartiality for its rating of the Turkish economy and companies.

Falling Creditworthiness

Most recently, on March 7, Moody’s downgraded Turkey’s rating by one notch to Ba2 from Ba1, and changed its rating outlook to stable from negative. The downgrade indicates a falling creditworthiness driven by increased risks facing the Turkish economy.

According to Moody’s, the recent downgrade of Turkey is driven by two key developments.  The first and primary driver is Turkey's external position, debt and rollover needs have continued to worsen, with the current account deficit widening 42 per cent to USD 47.1 billion. 

The second driver is that the Turkish monetary authorities appear still to be focused on short-term measures, rather than the detriment of effective monetary policy and of fundamental economic reform. This led to the government’s failure to control high inflation rates and a weakening lira currency. 

Moody’s recent warning were no different from ratings by other global agencies. In February, S&P affirmed Turkey's sovereign rating at BB with a negative outlook. It cited several risks facing the Turkish economy. The most prominent of which is the continued exchange-rate fluctuations of the lira, which negatively impacts high inflation rates. 
However, Fitch’s rating of Turkey appears to be more optimistic, as the global rating agency affirmed, in January, Turkey's long-term foreign currency rating at BB+ with a stable outlook. This, according to Fitch, reflects strong structural indicators that are better than peers, and the success of the Turkish economy in striking a balance between high inflation rates and high external financing vulnerabilities.

Persistent Tension 

The agencies’ lowered credit rating of Turkey triggered frequent criticism from the country. Several views considered the criticism as a continuation of previous warnings from President Recep Tayyib Erdogan who, in September 2014, threatened to cut off ties with the credit rating agencies and accused them of making unfounded and politically-motivated assessments of the Turkish economy. 

This coincided with regional and international criticism of these global credit rating agencies. That is due to their high volatile ratings that are largely built on general market sentiment, which does not reflect the real economic situation of any country. 

Erdogan intensified his attack on Moody’s for its latest rating. On March 9, he said that credit rating agencies are preoccupied with trying to drive Turkey into a corner to give a chance to those wishing to take advantage of such as situation. According to several reports, this cannot be separated from the current tension in Turkish-US relations. 
Additionally, Turkish Finance Minister Naci Agbal criticized Moody’s for its latest rating. He stressed that that “the Turkish economy continues its growth path with a strong structure, and described Moody’s rating as “not truly informed.”

Moody’s was not the only target of criticism from Turkish officials. When Fitch downgraded Turkey from BBB- to BB+ in late January 2017, President Erdogan’s equally strong criticism pushed the rating agency to decide to close its office in Istanbul in January 2018. The move reflects the rating company’s concerns about its normal operations in Turkey although it said that it remains “highly committed to Turkey” and its coverage of Turkey and of entities in the country remains “unchanged.”

This criticism comes at a time when the Turkish president is escalating his rhetoric against global economic institutions. On the fringe of the Justice and Development Party’s sixth provincial congress, held on March 12, Erdogan said, “If someone is to rule Turkey, that person is me. You can just take your money and don't think that you are running this country,” according to Ahval news. He was responding to an IMF’s February report on Turkey that weaned that the economy faces “signs of overheating”, most importantly high inflation resulting from failure to increase interest rate.

Due to a widening confidence gap with international institutions, Turkey is working on creating a central credit risk-rating agency that will gather information about Turkish institutions and companies. The move is in preparation for a national credit rating agency this year, as part of Banking Regulation and Supervision Agency (BDDK), according to statements delivered on March 13 by Mehmet Ali Akben, the head of the banking regulator. 

Potential Repercussions

Global credit rating agencies’ assessments of Turkey are greatly credible for the international business community. This is based on the presumed impartiality of their ratings, despite several disagreements broke out recently between these agencies and several states. Yet, in the case of Turkey, these ratings are in line with outlook of international institutions, such as the International Monetary Fund, for the Turkish economy. The IMF noted, more than one time, that Turkey was facing increasing economic risks in the past two years. The ratings represent an important reference for international investors at a time when pressures put by Turkey on these agencies do not appear to be impacting the rating process as such.  

Accordingly,  assessments by rating agencies can put continuous pressure on Turkish markets, as evidenced by a March 13 rise in the yield of Turkish ten-year bonds to its highest since November 2017 and up from 12.38 a day earlier, one week after Moody’s downgraded Turkey’s rating. This means a rise in Turkey’s foreign borrowing costs. 

In light of this, it can be argued that Turkey’s planned local credit rating agency will not be an effective replacement for global rating agencies that enjoy high credibility and reputation globally. This means that their assessments will continue to be effective despite Turkish criticism.