Sustainable growth should lead big 3 to revise up Turkey’s credit rating

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Turkey registered a growth rate of 5 percent in the first quarter of this year, according to a report by the Turkish Statistical Institute released on Monday. Analysts, business people and government officials view this strong performance as an outcome of government incentives, soaring exports due to increasing demand from European markets and surging industrial output. No word has been heard from credit rating agencies that have cut Turkey’s sovereign rating to junk over the past six months. However, if the country sustains this formidable growth performance in the second quarter, it is expected to trigger the big three U.S.-based credit rating agencies – S&P, Moody’s, and Fitch – to revise up Tukey’s credit rating.

After the release of growth data on Monday, which came as a surprise for many, President Recep Tayyip Erdoğan evaluated Turkey’s growth performance yesterday during a speech at the Justice and Development Party’s (AK Party) Group Meeting in Parliament. The president mused about what kind of action U.S.-based credit rating agencies, whose rating system has been criticized, will take given Turkey’s stronger-than-expected growth rate in the first quarter.

“We have all witnessed that the Turkish economy is large enough to overcome small shocks. I wonder what credit rating agencies will do next because they would have taken immediate action to downgrade Turkey’s credit rating, had the growth rate been realized under the projections,” Erdoğan remarked, pointing out the fact that Tukey is ranked among the top G20 countries with outstanding growth data. Moreover, commenting on the Turkish economy’s growth data, Chief Advisor to President Erdoğan Bülent Gedikli also underscored that the credit rating agencies, which downgrade outlooks and ratings without any substantiated technical analysis, must upgrade Turkey’s rating.

Currently, Turkey’s rating by all the big U.S.-based credit rating agencies stands at non-investment grade category, which is basically junk-status. However, despite its non-investment status, Turkey has managed to draw a large volume of portfolio investments this year. As for the portfolio investments, by the end of March, they registered a 5-percent increase compared to the end of 2016 and were recorded at $150.1 billion.

The record-breaking soar in the Borsa Istanbul, Turkey’s benchmark index, also proves Turkey’s position as an investible emerging market as foreigners made a net purchase of $1.15 billion on the stock market in the first three months. Furthermore, the foreign direct investment (FDI) report released by the International Investors Association of Turkey reveals that the country registered $2.8 billion in the first quarter by increasing around 2 percent compared to the same period last year.

Both the FDI and portfolio flow to Turkey, despite its non-investment grade, illustrates Turkey’s strong position among emerging markets, Enver Erkan Deputy Research Manager at the Kapital FX.

The tight monetary policy of the Central Bank of the Republic of Turkey (CBRT) not only stabilized the volatility in the currency, leading the Turkish Lira to positively diverge from its peers, but alleviated the currency pressure on investors and industrialists, Erkan noted. Moreover, the strengthening lira and the lack of developed country’s central banks raising interest rates with the expectation of lower inflation led foreign investors to flock to Turkish markets. As this trend in global markets seems set to continue for a while, Turkey will also preserve its position as an alluring investment haven, particularly after overcoming the political turmoil of last year and securing stability after the referendum.

Emphasizing the fact that Turkey’s GDP data were supported by an increased demand abroad, particularly in European markets, government incentives, surging exports and industrial output, Erkan noted that both domestic and foreign institutions revised up their projections for Turkey’s growth data, which raises expectations for a higher-than-expected cumulative growth data for 2017.

When analyzing the elements of GDP data, it is possible to see that investments composed 2.2 percent of the overall growth rate, the deputy researcher underscored, and highlighted the fact that if Turkey succeeds in sustaining this trend of ongoing investments, the second quarter will not be so different from yesterday’s data.

In order for Turkey to repeat the same performance, however, the country should ensure a sustainable growth, which can be fueled by manufacturing exportable goods and increasing exports and industrial output. “There is no reason not to expect the same levels of GDP growth in the second quarter, but it should sustain growth performance by producing exportable goods,” he said.Hoping to the see the impact of the Credit Guarantee Fund on investments in the second quarter, Erkan pointed to the industry’s performance in April. “Turkey’s calendar-adjusted industrial production rose 6.7 percent in April on a year-on-year basis, which demonstrates that Turkey made a great start to the second quarter,” he noted and said that the increase in industrial production, which is a very significant gauge of growth, is likely to continue in May as well.

Another essential element that renders growth sustainable, besides exports, incentives and industrial production, is the continued reforms that could improve the items of current account deficits and inflation. With more reforms and legal packages to ease investors’ burden on the government’s agenda, the second quarter seems more promising.

In the event of Turkey sustaining the same level of growth rate this quarter, credit rating agencies will have to revise their rating on Turkey. “If Turkey manages to sustain economic development, these institutions may take Turkey under observance to upgrade its outlook and prepare a positive report that hints at an upgrade,” Erkan underscored.

Drawing attention to the political bias of credit rating agencies, Taha Meli Arvas, a financial analyst, underscored Turkey’s high-performing credit default swaps (CDS), which are the most transparent benchmarks for market current perception of a country.

“Turkey’s CDS stand at the lowest level of the last 28 months at around 180,” Arvas pointed out and remarked that as for CDS, Turkey occupies a very bright position vis-à-vis other emerging markets such as Brazil, South Africa or developed countries like Portugal. The CDS data prove the confidence in Turkish markets, Taha explained, and underlined the subjectivity of credit rating agencies in their decisions. Therefore, he noted, sustainable growth is necessary to make these institutions reverse their decisions on Turkey, while they focus on politics. But it should be remembered that Moody’s quickly downgraded South Africa’s on June 9 after the country registered a 0.7 percent contraction in the first quarter swayed by political tumult. S&P also downgraded Qatar’s long-term debt to AA- from AA and put the country under watch with negative implications, after which credit default swaps soared and riyal plummeted, amid Gulf rift last week. It seems that these agencies are very quick in downgrading particularly in the face of political tensions, but not so fast in giving the due when deserved.



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