We are hungry for good news for a long time now. So it was pleasing that Fitch increased Turkey's note by two levels to BB+ this week. If nothing goes wrong, we can expect that the other two rating agencies will also increase our rating.
The picture encountered after the crisis forced rating agencies to question deeply the credibility of firms. It was widely discussed how Iceland, which was near the edge of 'bankruptcy' or some banks and bill insurers or firms that went bankrupt or were about to bankrupt had high credit ratings just a couple of months before the occurrence of these incidents. Regulation of credit rating processes by rating agencies is one of the main problems to be addressed under the widely discussed new financial architecture. Of course the low credibility of rating agencies themselves should not overshade the two-point increase in Turkey's credit rating; the purpose of this second paragraph was not to depreciate the rise in Turkey's credit rating. I have a different concern:
How is the state of Turkey's economy in the face of the rise in the credit rating? Rate of unemployment is 3.2 points higher than the year before. When non-agricultural sectors are taken into account, the difference rises to 4.1 points. Official estimates indicate that the economy will contract by 6 percent in 2009. Rate of contraction will most probably be above this reaching 7 percent. Yes, these figures pertain to the past and we have to see the future.
In that respect, it appears that Turkey can grow slightly above 4 percent in 2010. On the other hand, this rate can be achieved even if no steps are taken. What is more, no considerable easing will be achieved in 2010 in terms of the rate of unemployment. However, in 2005 and 2006, where Turkey's credit rating was lower, the pace of growth was much higher and unemployment rate was much lower than today. Of course we all know the moral of this story; but there is no harm in repeating it: high rate of unemployment is not a concern for credit rating agencies. The rationale for the rise in Turkey's credit note is related mainly with Turkey's 'successfully' overcoming the global financial crisis as well as with the fall in inflation and foreign finance requirement.
As a result, Turkey's debt payment capacity is one of the most important factors accounted in giving credit notes. This is how the system works, actually. And this is the purpose of the credit rating: there is no difference between firms' credit ratings and countries' credit ratings. Firms are rated by banks in order to make lending decisions. Banks would seek to make sure that the firm will repay the debt. In this context, high unemployment rate in Turkey is not a matter of concern in the eyes of the rating agency unless it creates a political risk that will reduce the possibility of repayment.
But do not you think that there is something odd about this? Assume that Turkey's credit rating was not increased but reduced by two levels. What would have happened then? The risks that are rising silently would have rise further immediately. Along with this, interest rate and exchange rate would have gone up and the confidence about the future of the economy would deteriorate. These trends would have got even sharper if the rating was reduced further. In such a milieu, investment plans would have been postponed; consumption expenditures and particularly expenditures on durable goods would have fallen down eventually leading to a rise in unemployment rate.
In brief, acts of firms who decide ratings ignoring an important indicator such as unemployment rate can have an effect on the prospective changes in unemployment rate particularly if the rating of the concerned country is reduced. In other words, you should have an economic status that will not rely on a rise in your credit rating to be introduced by credit agencies. But this is nothing but a wish. Or, it is by no means different than this empty statement: "guys, we should improve the growth rate and reduce inflation."
This commentary was published in Radikal daily on 06.12.2009
