Monday, December 7, 2009

Weekly Hurriyet Column: Despite Fitch’s sales pitch, Moody on Turkey

Below is the unedited version of my column for this week. You can read the final version at the Daily News website. I was able to come up with a second sans-movie reference cheesy title in a row:) As for the article, although I did try to assume readers might not be familiar with CDSs, I was not able to build from ground zero, i.e. sovereign ratings due to space constraints, meaning I had to assume that readers are familiar with ratings. Luckily, a recent article from the Daily News summarizes neatly all you need to know about ratings. So it is a nice complement to my column...

No sooner had the ink dried on my claims that Turkey’s fiscal position was being judged too favorably that Fitch upgraded the country’s long-term foreign currency rating two notches up, bringing it to just below investment grade.

It is not often that one’s writings get refuted so quickly, so I had to take a look at the rating agency’s press release. Unsurprisingly, the country’s resilience to the financial crisis as well as its strong credit fundamentals and debt tolerance were at the forefront. After all, a rating, whether for a company or a country, reflects ability to service debts.

More surprisingly, Fitch also mentioned the country’s downwardly mobile trio of inflation, current account deficit and interest rates as well as its strong banking sector and ability to survive without an IMF bailout. It is true that the trio is on the fall, but all for the wrong reasons.

As I reported earlier, statistical analyses reveal that at least half of the fall in inflation is due to global developments, while the ultra-low demand, which has stripped firms of their pricing power, has kept domestic components of inflation tame. In contrast, it was a challenge to keep inflation at single digits even with very high real rates before the crisis.

Similarly, the Central Bank just hopped on the global rate reduction bandwagon, taking advantage of the fact that domestic foreign currency positions’ buffer role against a scramble for foreign currency. One needs only to remember 2006, when a sudden dry-up of portfolio flows and sharp exchange rate depreciation led the Bank to hike rates 4 percent.

As for the current account deficit, it has fallen because the economy has been contracting, and there is not much of a financing requirement as before. For the better or the worse, Turkey’s current account deficit is a structural phenomenon, as the Central Bank papers I outlined two weeks ago show. Although Fitch notes the exchange has adjusted to a more competitive level, price-fixing is hardly the long-term solution to the deficit.

In fact, even if you take Fitch’s arguments at face value, you also have to weigh in the empty half of the glass, and this is where the country’s dismal growth performance comes in. Thursday’s third quarter growth release will secure Turkey’s place among countries most affected by the crisis. Moreover, leading indicators such as purchasing managers and real sector confidence indices are hinting to a slow recovery.

While a rating agency will not be too worried about staggering growth, unless there is a growth collapse, it will even care less about unemployment. For a country of Turkey’s demographics, next year’s expected 3-4 percent growth rate will not be enough to bring unemployment down.

Then, the billion-dollar question is, with elections looming, how far the government can resist to fiscal expansion. But even without such scenario analysis, the fiscal position is in dire straits as it is. With another year of more than 100 percent rollover on the horizon, a tough year awaits Fitch’s mighty Turkish banks as well as their borrowers who will be scrambling for credit.

To its credit, Fitch does mention its worries over the public finances. In fact, while it is true that Turkey has not needed an emergency bailout, the inability (or unwillingness) to reach a deal with the Fund reflects precisely such concerns. And it is also why Moody’s had signaled earlier that it wanted to wait for evidence on fiscal tightening, although at the end, it and S&P will probably have to follow suit and upgrade Turkey by one notch.

But it may pay to be moody on Turkey for now, at least until Thursday, which might be judgment day for the economy’s fate next year.

No comments: