Erdogan attacks rating agencies after Moody’s downgrade of Turkey

Erdogan attacks rating agencies after Moody’s downgrade of Turkey
Erdogan is not amused. / DonkeyHotey.
By bne IntelliNews March 9, 2018

Turkish President Recep Tayyip Erdogan on March 9 launched an attack on credit rating agencies two days after Moody’s Investor Service cut Turkey further into junk after concluding that its government seems focused on short-term measures, undermining effective monetary policy and economic reform.

Addressing his ruling AKP party at the Ankara parliament, Erdogan claimed the rating agencies are preoccupied with trying to drive Turkey into a corner and financial markets should not take them seriously, Reuters reported.

Populist Erdogan is already renowned for his unorthodox views on monetary loosening. While top economists have persisently called for tightening to address Turkey’s overheating economy beset by stubborn double-digit inflation and a tumbling Turkish lira (TRY), the president has lately renewed his unconventional calls for lower interest rates, claiming high rates cause inflation and that the banks, making unjustifiably fat profits, must not bend to the will of an international “interest rates lobby”. Some critics accuse Erdogan of ill-advisedly trying to pump up the economy in advance of the presidential and parliamentary elections due in 2019, but possibly set to take place this summer should there be a snap announcement of early dates.

Moody’s an “economic hitman”
Earlier on March 9, in a live interview with state-run TV station TRT reported by Bloomberg, Erdogan’s senior adviser Cemil Ertem said Moody’s decision on Turkey’s sovereign rating lacked rationality and added that the rating agency was acting like an “economic hitman”. Turkey, he said, should review its agreements with credit rating companies.

Ertem went on to warn bankers that the government is working to make sure lenders do not act oligopolistically. He reportedly said: “Everyone should mind their steps. We’ve reached the end of the road and of patience. It’s beyond the point of debating whether regulations are enough or not.” He added that if he were the head of the state-extended Credit Guarantee Fund (CGF) for backstopping bank loans, he would tell banks to not lend to corporations at a higher rate than a level determined by a certain spread over TRLIBOR.

Banks should “atomise” loans to exporters and industrialists, they should not just lend to “big groups,” Ertem was also reported as saying.

Responding to Ertem’s remarks, Timothy Ash, senior sovereign strategist at BlueBay Asset Management, said in a note: “In 20 years covering Turkey I can honestly say it has amongst the best economists, bankers and technocrats you can meet—top notch. Testimony therein, it is incredible how Turkey managed to turn things around after the 2001/02 crisis… Indeed, Turkish technocrats who undertook the 2001/02 reforms have been going around the world sharing their hard won best practice, and helping other countries improve. But all that effort is being undone by this kind of commentary which sounds like tosh to any reasonable mainstream economist.”

Moody’s downgrading of Turkey largely came as a surprise to markets getting used to the country’s economy defying the odds, even though in the past six months or so they have grown increasingly anxious about the storm clouds gathering over the economy much caused by a problem of over-lending leading to a build-up of vulnerabilities in the banking sector.

In lowering the rating on the Turkish government’s long-term issuer and senior unsecured debt ratings to two levels below investment grade—taking it to ‘Ba2’ from ‘Ba1’—Moody’s also pointed to political factors, such as the prolonged state of emergency still in effect after its introduction following the attempted coup in July 2016, and referred to “explicit tolerance of high inflation [demonstrating] the priority accorded to short-term growth regardless, it appears, of the medium-term consequences.”

Moody’s also noted that although the government's own external borrowing needs are relatively low, the country as a whole has very large external financing needs given sizeable current account deficits, maturing long-term debt and high levels of short-term debt. Its analyst Kristin Lindow wrote: “This external exposure has continued to grow over the past year and is expected to continue to do so… The country's foreign exchange buffers are very low compared to these needs; the country's External Vulnerability Indicator is expected to rise to well over 200%, which is extremely high in comparison to Turkey's rating peers, and signals an ever-rising exposure to changes in international investor sentiment.”

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