In its first investment grade rating upgrade since 1994, Turkey has been raised to investment grade (BBB-) from below investment grade by Fitch. While countries with the same credit default swaps as Turkey have already been raised to investment grade, Turkey had been maintained at below investment grade for a long time. Although late, Fitch’s upgrade granted Turkey what it deserves, and this new rating is to some extent closer to the market rating of the credibility of the Turkish economy. While numerous other countries are on the brink of bankruptcy due to high debt and low growth rates caused by the global economic crisis, Turkey’s economic growth and its debt and budget deficit-to-GDP ratio, which is much lower than the Maastricht criteria, proved to be effective in Fitch’s upgrade. Furthermore, despite shrinking foreign demand, Turkey’s export performance and the decrease in the current deficit in the last year greatly contributed to Fitch’s upgrade.
FUNDS WILL FLOW INTO TURKEY
Fitch’s upgrade will not only enable domestic investors to do business, receive favorable loans from abroad, and sell bonds but will also have a positive effect on the financing of major infrastructure projects requiring foreign financing. Trillion-dollar investment funds such as individual pension funds in the U.S. invest in a country on the condition that this country is upgraded at least to investment grade by rating agencies. As Turkey has met this benchmark, these funds will flow into Turkey and Turkey will thus receive low-cost funds. Nevertheless, a great responsibility falls on the shoulders of the Central Bank in case the possible increase in capital inflow results in overvaluation of the Turkish lira.
NOW IT’S OTHER RATING AGENCIES’ TURN
Fitch’s move will contribute to other rating agencies in the oligopoly market (S&P, Moody’s and JCR) making similar decisions. This is because rating agencies will be under pressure to upgrade Turkey’s rating due to the nature of the oligopoly market where a small number of oligopolists are aware of one another’s actions. Therefore, these rating agencies will be compelled to upgrade Turkey’s credit rating after a short period of time.
Furthermore a great responsibility falls on the shoulders of regulatory agencies, notably Turkey’s Treasury, Banking Regulation and Supervision Agency and Capital Markets Board so that other credit rating agencies upgrade Turkey as well. These agencies must strictly supervise and compare the reports from international rating agencies with their own forecasts, impose sanctions on these rating agencies if necessary and give feedback. These efforts will pave the way for rating agencies to be more sensitive while rating Turkey.
TURKEY SHOULD CONTINUE SEARCHING FOR ALTERNATIVE WAYS
Being raised to investment grade—which had been one of the greatest obstacles to international capital inflow into Turkey—is crucial to sustain Turkey’s economic performance. In order to reach the 2023 goals, the current growth rates must increase. In this sense, the recent upgrade will serve as a significant catalyst. Additionally, Turkey raised its political power in the region and it should do the same in the regional economy as well. It should lead the way for establishing an alternative credit rating agency, which is an integral part of Istanbul Financial Center (IFM); in other words, it is an inseparable part of the Center. Therefore Turkey shouldn’t abandon its quest for establishing an alternative rating agency due to Fitch’s upgrade.
Translated by Gülgün Kozan Köse
