Moody's downgraded Turkey's credit rating to "Ba1" or "junk" level from "Baa3," on Sept. 23. However, given the macroeconomic indicators, Turkey's Gross Domestic Product (GDP), growth rate, total investment-to-GDP ratio and debt-to-GDP ratio compares favorably with many other countries carrying the same credit note. The U.S.-based credit rating agency's decision is considered politically motivated by the government and the Turkish business community and it has raised concerns about the credibility of the agency. Moody's announced on Friday that Turkey's long-term credit rating was revised from "investment grade level" to "junk" as a result of negative monitoring that started on July 18 following the Gülenist Terror Group's (FETÖ) July 15 coup attempt.
The agency said the country's finances have weakened amid increased political turmoil since July 15, while economic indicators prove the opposite. Moreover, it was again Moody's who said the shock to Turkey's economy following the July 15 failed coup attempt had largely dissipated and there was no need to announce a decision for at least a month. And that statement was just two days before the downgrading on Sept. 23. Also, Moody's had previously downgraded the credit ratings of Hungary, Azerbaijan, Russia, Portugal, Costa Rica, Paraguay, Guatemala and Morocco to "Ba1," but in terms of macroeconomic indicators, Turkey comparatively stands out with good numbers according to the forecast data released by the International Monetary Fund (IMF).
While Moody's cut Hungary's long-term credit rating to Ba1 level on Sept. 16, the international credit rating agency downgraded Portugal's rating on July 3; Azerbaijan's on April 29; Russia's on April 22; Costa Rica's on Feb. 25; Paraguay's on March 20, 2015; Guatemala's on June 20, 2014; and Morocco's on March 23, 2010.
According to Moody's rating scale, prime and high grade countries are rated with "Aaa," "Aa1," "Aa2" and "Aa3" while the credit ratings of the countries with medium grade is defined as "A1," "A2" and "A3". Countries in the low-level investment grade group are represented with "Baa3," "Baa2" and "Baa1" credit ratings. Ratings below this level are classified as "junk level" by Moody's, and consist of "Ba1", "Ba2", "Ba3", "B1", "B2", "B3", "Caa", "Ca" and "C" levels respectively.
According to the IMF, countries with downgraded ratings continue improving their macroeconomic indicators despite global cyclical fluctuations. Compared to those countries and given the IMF's 2016 growth estimations, Turkey stood out with its growth rate, the size of its GDP and total investments.
Considering this year's estimated GDP numbers, Turkey comes second with $751.2 billion following Russia's GDP, which amounted to $1.1 trillion. Regarding the expected growth rates in this group, Turkey is followed by Portugal with $205 billion, Hungary with $117.7 billion, Morocco with $108 billion, Azerbaijan with $35.1 billion, Costa Rica with $56.9 billion, Guatemala with $68.1 billion, and Paraguay with $26.8 billion.Considering the aforementioned countries' 2016 growth rates, Turkey stands out with 3.8 percent among Azerbaijan (minus 3 percent), Morocco (2.3 percent), Hungary (2.3 percent), Paraguay (2.9 percent), Portugal (1.4 percent) and Russia (-1.8 percent).
With regards to the total investment to GDP ratio, Turkey is in a better condition with 19.1 percent than Portugal (14.5 percent), Paraguay (16.3 percent) and Guatemala (12 percent).
On the other hand, the indicator of the share of 30.7 percent public debt in GDP suggests that Turkey stands out from all countries in this group except Russia, Paraguay and Guatemala.
Moreover, for some analysts, even at "junk" status, Turkey is a more attractive prospect than South Africa, which is facing its own political turmoil with investor doubts about South African President Jacob Zuma.
Moody's rates South Africa's sovereign debt two notches above Turkey's. "This seems perverse given the political/policy setting in South Africa, (and) worse ratios over Turkey," said Timothy Ash of Nomura International in London.Analysts often point to concerns about Turkey's rising household debt-to-GDP ratio, which reached a record high of 21.8 percent in the first quarter of 2015, and stood at 19.4 percent at the end of last year, according to IMF data. While that corresponds to a 174 percent increase over the last decade, it is still less than half of South Africa, where the household debt to GDP ratio is at 46 percent. "Now it is out of the way, one risk factor has been removed," said Nomura's Ash. "Proves there is life in junk bond status -- as Russia, Hungary, Croatia, et al will tell."
Moody's downgraded 6 banks' covered bond rating
Concluding its review for 17 Turkish financial institutions, Moody's Investors Service has downgraded the long-term debt and deposit ratings of 14 entities and confirmed the ratings of three financial institutions. The action follows the downgrade of the government's debt rating to Ba1 from Baa3.
The institutions affected by the international credit rating agency's long-term debt and deposit ratings downgrade are Akbank, Alternatifbank, HSBC, ING Bank, Ziraat Bank, Halkbank, Vakifbank, TEB, Garanti Bank and Yap? Kredi.
Moody's also downgraded the long-term debts ratings of ?? Bank, ?ekerbank, TSKB and Turkish Eximbank. The credit ratings of three Turkish subsidiaries of foreign banks; Burgan Bank, Denizbank and Finansbank- have been confirmed by Moody's as well.
Moody's statement suggests that 15 out of the 17 banks under assessment have a stable outlook while only Denizbank and ?ekerbank have a negative outlook.
Following the downgrade of Turkey's credit rating, Moody's also cut the covered bond ratings issued by six Turkish banks including Akbank, Denizbank, Garanti Bank, ?ekerbank, Vak?fbank and Yap? Kredi Bank.
Moody's noted that the review for the potential downgrade of Vak?fbank bonds is still in progress. Moody's announced that its decision followed Turkey's credit rating cut on Sept. 23.
Demand for Turkish bonds quadruples
After suggesting in an earlier statement on Sept. 21 that Turkish economy got over the coup attempt shock, and later downgrading Turkey's credit rating below the investable level on the night of Sept. 23 upon 'instruction', Moody's received the best response from the markets. Despite Moody's negative perspective campaign towards Turkey, demand for the bonds were approximately four times the size of the issues, and the interest rates stood below the expectations.
Treasury held three biddings on Monday as a part of September borrowing program. While the total amount of offers in three biddings reached TL 19.5 billion including the non-competitive ones, the amount of sales including the public acquisition hit TL 5.8 billion.
Investors' great interest in especially the long-term papers during the biddings proved their trust in Turkey's future. Demand for the bond, maturing on January 14, 2026, was almost five times the size of the issue worth TL 10.5 billion. On the other hand, by issuing TL 2 billion worth of Sukuk on Tuesday, Treasury revealed investors' trust in Turkey.
Noting that it would be incorrect to ask foreign investors to make busy sales and completely empty their portfolios, Kapital FX Research Expert Enver Erkan said if the drawn statements were true, no bond request would have come to the biddings.
Highlighting that very strong results were gained at the biddings, Integral Securities Research Director Tuncay Tur?ucu said the interest rates are below the expectations, which is a sign of trust. Suggesting that Treasury might have even made small sales on purpose, Tur?ucu said credit downgrade does not mean Turkey will not fulfill its obligations.
Turkey has investment grade status: Japan Credit Rating
Turkey still retains the status of an investment grade country even after Moody's recent rating cut, Eurasia administrative council director of Japan Credit Rating Agency (JCR), Orhan Ökmen, told Anadolu Agency yesterday. Credit ratings agency Moody's recent decision saw Turkey's rating downgraded to non-investment grade.
Ökmen said for the great majority of pension funds to be able to invest in a country's economy, investment grade status needed to be confirmed by at least two international rating agencies, regardless of recognition. "Those credit agencies being renowned more or less is not a criterion. The basic criterion is being a 'Nationally Recognized Statistical Rating Organizations [NRSRO],'" Ökmen said.
Of the 10 Nationally Recognized Statistical Rating Organizations currently recognized by the Securities and Exchange Commission (SEC) in the U.S., two have Turkey's sovereign credit rating as investment grade, according to Ökmen. "One of those agencies is Fitch and the other is JCR. Thereby, Turkey still retains its investment grade position," he said. Ökmen also added that foreign exchange liquidity in Turkey was resilient and sufficient in case of possible shocks. "[There is] no problem in the ease of access to funds, public debt and the interest burden are at very reasonable levels. Therefore, in terms of financial stability Turkey is [...] in place," he added.
Ernst & Young: Moody's rate cut to 'not stop investments in Turkey'
The credit rating agency Moody's recent rate cut would not deter investors from Turkey since the country offers great investment opportunities, head of the multinational audit firm Ernst & Young, Turkey chapter, Metin Cano?ullar?, said Tuesday. Speaking at a press conference Cano?ullar? said: "Where will the capital flow? How many countries are there that offer such opportunities? Interest in Turkey will never die." He said investors would continue to invest here since there were few countries at par with Turkey in terms of opportunities.
He said many sectors in Turkey provided great investment potential due to the country's dynamic structure. Also, he noted that Turkish firms would be the most probable candidates during the reconstruction phase in Syria once the civil war there comes to an end.
"Turkey is not a market from which you can easily return once you get out. That's why they should think and plan very carefully and have a big vision," he said.
Source: Daily Sabah