Very expensive economic lessons for Turkey

Our economy administration wasted billions of cash foreign currency of the Central Bank and public banks just to maintain a self-styled economy policy and to keep the foreign exchange rate at a certain level. It is a pity that now, this economy management, with its collapsed economy policy, is resorting to the monetary tightening of the Central Bank.

Every day, people, here in Turkey, point out to the record levels reached by the U.S. dollar in forex rates: “It has become 7.50; it is record high at 7.60; new record is 7.70.” While the Turkish Lira is eroding day by day, the question the other day was whether or not the Central Bank would raise interest rates.

The Bank did raise the interest rate by 2 points to 10.25 percent. In fact, what was done was this: The tightening in the liquidity channels since the beginning of August had already increased the average interest rate of liquidity to 10.6 percent. The bank has made what was de facto, official. Even though there are certain people who think this is the correct step, we should keep in mind that the estimated inflation rate for next twelve months is 10.2 percent. With this increase in rates, which corresponds to zero real interest rate, it is not possible to curb inflation. It is still behind what needs to be done to fight inflation.

Will this move make the investor or the saver prefer Turkish Lira? No, it will not. There is no “real” interest rate and at the same time it is not possible anymore to regain the lost confidence of the saver by raising interest rates. 

Our economy administration wasted billions of cash foreign currency of the Central Bank and public banks just to maintain a self-styled economy policy and to keep the foreign exchange rate at a certain level. It is a pity that now, this economy management, with its collapsed economy policy, is resorting to the monetary tightening of the Central Bank.

It is just equally painful that even in social media feeds, the joke is “it cost us 100 billion dollars’ worth of foreign currency reserve to understand that the cause of inflation is not interest rate.” 

Turkey is not such a rich country to take an economy lesson that is so expensive.     

Ankara eroded the foreign exchange reserves of the country to keep the dollar exchange rate around the 6.85 level until the end of July. With this, Ankara has also provided a somewhat fixed rate guarantee for the exit of foreign investors.  

Foreign investors, though, must be grateful that foreign currency was sold at a fixed rate. The fluctuating exchange rate regime, which has a function of absorbing external shocks, was already effectively suspended. The residents are also thankful because those who were late in buying foreign currency were able to make up for it when gold prices increased in international markets and they made use of the low forex rates. 

In this landscape, which has no economic policy framework, Turkey also lost credibility before investors. 

Investors keep an eye on international credit rating agencies. Majority of them keep assets in their portfolio according to investment criteria that obliges them to respect credit ratings.

In fact, rating agencies fall behind the times most of the time, both in rises and falls. Many investors actually act much before the international agencies by “buying” the state of affairs of a country.  

The signal six years ago

International rating agency Moody’s downgraded Turkey’s outlook to negative in April 2014. This was a warning. It pointed out the weaknesses in the current evaluations and warned that the rating would be further downgraded unless there are improvements in the medium term. 

It was more or less known when the next downgrading would take place following the first negative rating; it was between 18 to 24 months.

On September 26, 2016, Moody’s downgraded Turkey’s sovereign credit rating to speculative grade from investment grade. This is exactly 30 months after that warning. In the meantime, Turkey held two elections. The institution must have waited for some reform steps for improvement.

Not only such steps were not taken, the country survived a bloody coup attempt.

When that downgrading came, the Energy and Natural Resources Minister Berat Albayrak who was more in charge of economy than economy related ministers at that time in Ankara, said, regarding Moody's downgrading, “Who cares.” Albayrak said, “We do not care and we will not care if some people upgrade or downgrade ratings. We will continue growing as a country and maintain our stance. Thank God, we are aware of this game. Our economy is improving each day. We are aware of the perception operation.”

This rhetoric has continued up until this day: Certain powers are making perception operations; officials in the government are watching it. 

Let us go back to 2016. Turkey had lost one of the two ratings from two separate institutions that ranked it as an investment grade country. As a tactic, Turkey was expected to have exerted some effort to keep the other one, but officials had an indifferent stance.

As a matter of fact, on January 27, 2017, Fitch, the other credit rating agency, downgraded the only remaining “investment grade” to “speculative grade.” 

Return to 1994

Turkey was given an investment grade for the first time in May 1992. It lost it in January 1994. In November 2012, after a long time, Fitch upgraded Turkey to the investment grade again. Thus, Fitch opened the investment grade for us in 2012 and closed it in 2017. This hard-earned rating was lost in a very indifferent manner. 

These international rating decisions were explained to the domestic public with hostile wrapping, within conspiracy theories, such as “perception operations,” or “foreign powers want to destroy us.”

So much so that Fitch closed its Istanbul office in January 2018. A source, at that time, said it had become impossible to write an independent analysis report from Istanbul that would be the basis of the rating, because this job required an environment of freedom of expression and Turkey was fast moving away from the principles of separation of powers and rule of law. In 2012, analyst posts were moved to Moscow and London, the source said. 

The basic job a credit rating agency does is review companies, financial instruments or state treasuries, check their repayment capacities and rate them accordingly. They inform their clients, the institutional investors with money, of their findings. 

Consequently, any country, company or institution which has limited resources aims for the investment grade so that they can attract rich institutional investors. 

There is no meaning or substance in the statement, “We do not care about rating agencies.” 

Credit rating agencies made some mistakes prior to the 2008-2009 global crisis. We have witnessed several companies, banks or financial institutions, despite having received good credit scores, go bankrupt. After the 2009 crisis, Dodd-Frank act was enacted in the U.S. where credit rating agencies also undertook financial liability. Turkey also adopted similar regulations. 

From 2016 onwards, Moody’s downgraded Turkey three more times, March 2018, August 2018 and June 2019. Most recently, an announcement from Moody’s on September 11, 2020 said Turkey’s grade was lowered again. While Turkey’s rating went down from B1 to B2, our outlook was made negative. This level is considered a “very speculative” level.

Four times four 

After Minister Albayrak said “Who cares,” he was the minister in charge of the economy in three of the four downgrades in the past four years. 

According to the Moody’s credit rating scale, the latest downgrade shows that we are close to the bottom. If we drop two more places, then our grade will be “C,” which is the “highly speculative” category, very near default. 

If Moody’s rating drops and changes in the outlook had been taken seriously, then today the country would not be in this fall that is explained to the public as “the game of foreign powers.”

One of the striking rationales of the last Moody’s downgrading was, “As the risks to Turkey’s credit profile increase, the country’s institutions appear to be unwilling or unable to effectively address these challenges.” This is the diplomatic language used to refer to the stance of “Who cares?” 

I don’t know how an institutional collapse can be otherwise described but as a result of this fall that came step by step in the past 10 years, Turkey has moved rapidly away from “high income countries” group without entering it, and its national income has dropped from the levels of 900 billion dollars to 700 billion dollars. It has lost its reputation economically to a huge extent.

Dozens of other issues such as the increasing army of the unemployed due to the pandemic have been added to the already existing ones that were swept under the carpet. 

Actually, there is a way out from all these problems. It may be painful in the short term but there is the potential to overcome these problems rapidly in the medium term. As Turkey was able to succeed in overcoming past crises, these tools are changing politics at the polls, with the normalization of politics, with pluralist and participatory democracy and rule of law. 

As the poet says, with my humble translation, from Kemal Burkay, “Smile, maybe a new film will come to town, maybe there will be a forest in scripts, maybe the climate will change, Mediterranean weather will come, smile…”

September 10, 2021 Central Bank's Beştepe problem