Turkey to Ratings Firms: Who’s The Boss Now?

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By Emre Peker

ISTANBUL–Turkey lamented the purported unfairness of ratings agencies that trapped the country in junk status for many years while the government limited its criticism to verbal outbursts as it courted foreign investors. Not anymore.

Recently armed with its first investment-grade rating in almost two decades and seeing record levels of investor demand for Turkish stocks and bonds, Prime Minister Recep Tayyip Erdogan’s government did what Ankara wanted all along: dump Standard & Poor’s as a sovereign ratings provider to show the world who’s the boss.

“We are converting our issuer credit ratings on Turkey to ‘unsolicited’ as we no longer have a rating agreement with this sovereign,” S&P said Monday in a statement. The firm said it will continue to rate Turkey “because we believe there is significant market interest in this unsolicited rating.”

If governments could pick favorites and play ratings firms against each other, Turkey would be the example du jour.

Since May, Ankara has been raging against S&P, which at two steps below investment grade has the lowest rating on Turkey among the three major agencies. At the time, the New York-based firm cut its outlook on Turkey’s BB rating to stable from positive, citing headwinds in efforts to rebalance the country’s economy.

That drew a sharp rebuke from Turkey’s strong-willed prime minister and other officials including soft-spoken and internationally respected Finance Minister Mehmet Simsek. The main critique was that S&P’s decision was politically motivated and had nothing to do with Ankara’s ability to repay debt.

“The cost of this will be a statement from us that says ‘I do not recognize you as a credit institution,’” Mr. Erdogan burst out after S&P’s move last year. And while the premier’s proposal to establish a Turkish credit-rating firm has yet to flourish, the government did do away with S&P.

In the lead up to Ankara’s decision against renewing its agreement with S&P, Turkey kept attracting investors as expansive central bank policies worldwide pumped cheap money into the global economy. The steady cash inflow helped Ankara overcome speculation that it was in yet another boom-and-bust cycle.

In 2012, Turkey managed a soft landing of its $800 billion economy as officials curbed credit-fueled domestic demand and boosted exports. That helped prop up the lira, slow inflation to 6.2% from 11.1%, cut down the current-account deficit by more than $20 billion to 6.5% of gross domestic product, and expand the economy by 3% on the back of record exports.

As it crystallized that Turkey would avoid an economic hard-landing, and despite its ongoing dependence on external funding for economic growth, the government snatched the lowest investment-grade status of BBB- from Fitch Ratings in November.

Buoyed by resilient economic growth that’s forecast to rise to 4% this year–higher than emerging market peers including Poland and South Africa, according to the World Bank–Turkey now has what it always coveted: economic weight to throw around.

Ankara’s first act came last week, when the Treasury flexed its muscle to replace S&P with Fitch as one of the two major agencies that will rate its debt in 2013. Moody’s Investors Service kept its role as the second firm amid widespread speculation that it will raise Turkey’s rating by one notch to investment grade sometime this year.

“Fitch has a full investment grade rating now for Turkey so I guess is flavor of the month,” said Tim Ash, head of emerging market research at Standard Bank Plc in London. “The government is also probably sending a non-too-disguised message that it sets little store or value in the S&P rating at BB–it has long argued that the current junk bond rating is unjustified and unfair, and we would agree.”

Recep Tayyip Erdogan,

Standard & Poor’s,

Turkey

via Turkey to Ratings Firms: Who’s The Boss Now? – Emerging Europe Real Time – WSJ.


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