RBS economist: Erdoğan is right, S&P’s Turkey analysis flawed

RBS economist: Erdoğan is right, S&P’s Turkey analysis flawed

Prime Minister Recep Tayyip Erdoğan on Thursday harshly criticized the international credit rating agency Standard & Poor’s for its decision to change its outlook on Turkey from positive to stable. (Photo: AP)

May 04, 2012, Friday/ 15:31:00

A leading economist with the Royal Bank of Scotland (RBS) has said international credit rating agency Standard & Poor's latest decision to revise its outlook on Turkey's sovereign rating is flawed and that Prime Minister Recep Tayyip Erdoğan had a point when criticizing it.

“Turkey has not defaulted [on its debt], was not subject to financial restructuring and is a powerful country with strong repayment ability. Certainly it deserves a better grade,” said Timothy Ash, global head of emerging market research and strategy at the bank, speaking on a private business news channel program on Friday.

“Turkey is servicing its obligations and trying to solve its fundamental problems. This should be taken into account. Contrary to many scenarios proposed for the country, Turkey continued fulfilling its responsibilities [vis-à-vis its creditors] even after the 2001 crisis. International markets consider Turkey already at investment country status. So one of these must be wrong, either the markets or the credit rating agencies,” he underlined.

S&P cut the outlook on Turkey's BB sovereign credit rating on Tuesday, saying risks to its creditworthiness had risen as a result of its high debt and worsening terms of trade as demand for its exports weakens. “Less-buoyant external demand and worsening terms of trade have, in our view, made economic rebalancing more difficult, and have increased the risks to Turkey's creditworthiness given its high external debt and the state budget's reliance on indirect tax revenues," S&P said in a statement, announcing its relevant decision that received much criticism from inside Turkey.

According to most recent data, the national export volume decreased by 2.9 percent in April compared to the same month a year ago, while the January-April exports were measured at $46.8 billion with an 8 percent year-on-year increase. The terms of trade refer to the relative price of exports to imports. Other than S&P, Moody's rates Turkish credit Ba2, two notches below investment grade, with a positive outlook. Fitch ranks Turkey BB+, just one notch below investment grade. Ash said the country's rating should have been at least two or three grades higher.

For Erdoğan, S&P cut Turkey's outlook because it knew it had to upgrade the rating -- something it did not want to do because of “ideological reasons” -- after it had kept the outlook positive for some time. “And on the other hand it upgrades Greece. Can there be such nonsense? This is a completely ideological move. It also upgrades Ireland. These are the countries the International Monetary Fund [IMF] and the European Union have bailed out, pouring in hundreds of billions of dollars. Can there really be such an approach? Completely ideological. No one will buy this. You cannot make Tayyip Erdoğan buy this,” the prime minister said in anger, addressing participants at a fashion and ready-to-wear clothing conference in İstanbul on Thursday.

The prime minister was not alone in reacting against S&P. Economy Minister Zafer Çağlayan actually moved faster to lash out against the agency. “I advise S&P to check its standards because such institutions sometimes unfortunately fail to be sincere in their analyses of Turkey,” he said on Wednesday. “And why do I say so? Because those credit rating agencies gave Ireland and Iceland investment grades only a year before they went totally bankrupt. Now those countries are in intensive care units,” he added.

The minister was joined by Turkish Union of Chambers and Commodity Exchanges (TOBB) President Rifat Hisarcıklıoğlu on Thursday. “I believe we should no longer take those credit rating agencies seriously,” he said, adding, “This particular agency made a standard and poor analysis, just like its name suggests.”

Economists have previously raised serious allegations against international credit rating agencies and accused them of being biased on many occasions. Among them were also Turkish experts, who expressed concern over those agencies' reliability as independent financial institutions.

Writing for the Turkish Zaman daily, Denizbank chief economist Saruhan Özel noted on June 1 of last year that those institutions have caused serious damage to the global financial system by making “unacceptable” mistakes during the 2008-09 global financial crisis. “The financial system in the US, the crisis' epicenter, institutions that did not want to carry the likely-to-default mortgage loans in their portfolios came up with complicated methods to sell these loans as bonds all over the world. They needed high ratings from those agencies and somehow they got those ratings [by paying high prices in return],” he wrote, adding, “What is interesting is that those agencies have made huge revenues through such mortgage bond ratings.”

Özel believes that these institutions still not increasing Turkey's credit rating to investment grade, even though Turkey is not showing any signs of difficulty in repaying its debts, contradicts unbiased technical observations and analyses. “For a lot of corporate investors, countries like Turkey that are repaying all their debts on time without any problems but whose credit ratings are insistently kept below investment grade are valuable. By lending to them, they are making very good money,” Özel said, drawing attention to the fact that Turkey's Credit Default Swap (CDS) rate is much lower than that of other countries that are also given credit ratings below investment grade. “Either one of these two things are untrue. Turkey should either enter a crisis and its CDS should rapidly rise, or credit rating agencies should back off their insistence and raise Turkey's rating to investment grade. Given the major mistakes those agencies made in the past, the answer to this question is quite obvious,” he underlined.

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