Credit Rating Will Not Improve, Outlook Though Might…
Last week Turkey’s inflation rate was released and it turned out to be higher than last year’s. However, the private banks and the media keep backing the economic team since they are afraid that the previous team might return to office.
Obviously, no one wants the return of the previous economy officials, which were infamous for constantly exerting pressure on banks and suffocating the money market. Therefore, the private banks and the media protect the current management as fiercely as they can because they think that it has “at least” taken some reasonable actions so far. We all know that if people continue to complain about high inflation, high borrowing rates hence the high cost of living, the President and his team will not stand by and watch.
The actions of the current economic team help externally-funded organisations, but it is the people who will decide the winner of the elections. Therefore, it is the vote of the people that matters, not the vote of corporations or construction contractors. Also, the fact that the current economic team has failed to gain sympathy from the people due to rising borrowing rates, fewer credit opportunities, and ever-increasing taxes and cuts does not go unnoticed either. So it might be reasonable for us to expect an intervention from the top.
Perhaps for this reason why the Minister of Finance and Treasury keeps giving messages to the markets. The Minister’s statements such as “Inflation is high but it is in line with our MTP targets” or “We expect our credit rating to be upgraded” are aimed at both soothing the concerns and raising the bar of expectations. But according to the people on the street, this year will be quite difficult and the new economic team is no different than the old one. Not to mention that expecting an improvement in our credit rating is really is nothing more than wishful thinking.
Credit rating agencies do investigate the level of a country’s forex reserves before deciding whether or not to upgrade a credit rating. And the state of Turkey’s net reserves, which have recently diminished again, is pathetic. I don’t know if international financial institutions would consider this a positive factor to affect their future determination about Turkey’s credit rating. I think, having seen that the credit rating is not upgraded, the government will say, “We did the best we could but they did not raise it” and this will be a strong campaign material for the coming local elections.
Some say that they do not expect a drastic increase in exchange rates but the arguments on which they base their prediction are not very solid. As I mentioned before, a possible earthquake in Istanbul and possible changes in economic team remain as the highest potential risks to Turkey. I think any plans that are made without taking these risks into consideration need to be reformulated. At least a plan B should be in place.
