The Kapali Carsi

Still Moody on Turkey

All the investors I spoke to during my London investor trip two weeks ago were wondering how the Central Bank would respond to excessive capital flows, and whether credit rating agency Moody’s would follow in Fitch’s footsteps by upgrading Turkey to investment grade.

We will get partial answers to both questions this week. Tomorrow we have the Monetary Policy Committee rate-setting meeting, whereas Moody’s is holding its annual Turkey Credit Risk Conference on Wednesday.

This is the intro. to my latest Hurriyet Daily News (HDN) column, where I discuss what the Central Bank of Turkey will do at tomorrow’s rate-setting meeting, and whether the credit rating agency Moody’s will upgrade Turkey this week around its annual Turkey conference on Wednesday. You can read the whole thing at the HDN website, but I should give the executive summary for those who don’t have the time: I believe the Central Bank will not cut the floor of the interest rate corridor, but only the ceiling, while at the same time increasing Reserve Option Coefficients further. As for Moody’s, I don’t think a rating upgrade is likely this year, although I explain how easily they could justify one if need be. OK I admit, I am really bad salesman; I gave up all the column in two sentences, but just click on the damned thing even if you won’t read it; you’ll at least increase my popularity:)

As for an addendum, I explained the rationale for my calls in my latest post.  There are a couple of issues that weren’t mentioned in the column as well as there. As for the policy rate decision, an interesting issue is whether the lira is really overvalued or not. In a recent research note, Neil Shearing from Capital Economics looks at which EM currencies are overvalued by looking at deviation of the real effective exchange rate (REER) from its long-term trend as well as using Peterson Institute’s Fundamental Equilibrium Exchange Rate (FEER), which is ” the exchange rate that can be expected to sustain a current account surplus or deficit that matches the country’s underlying capital flows over the economic cycle”.

Turkey does not look that overvalued in terms of REER devaition from trend, but it is by far the most overvalued currency when you use FEER- that is normal because the country has a huge current account deficit. Anyway, Neil concludes that the Turkey, along with Russia, Brazil, Egypt and Venezuela, has one of the most overvalued currencies, where Asian currencies, including the Chinese renminbi, are undervalued.

As for Moody’s, one fact I failed to mention is that the agency already upgraded Turkey in June, so another upgrade so soon is unlikely.

To sum up: here are all the points I made in the blog and in my column about the rate meeting and Moody’s,

Rate-cut in the floor

Against (my call):

  • The lira depreciated around 2 percent since the Governor’s speech, as the Governor managed to talk the lira down. He succeeded, and so no need to cut. Besides, the lira is further away from the threshold 120 level as before (see graph below)
  • The global environment makes a cut less likely. The Central Bank made this mistake in August 2011 by cutting in the middle of the EU crisis, so they have presumably learned their lesson.


  • The Central Bank has undertaken risky bets before, i.e. in August 2011 (see above).
  • The Bank has preferred to signal its moves ahead, so maybe Basci was simply saying they would cut the floor.
  • Fiscal cliff temporary, and Turkey looks to be getting lots of capital inflows in that world, so why wait?

Moody’s Upgrade Before the end of the year

Against (my call):

  • The rating agency already upgraded in June 2012. Another upgrade so soon is unlikely.
  • Analogies to Fitch, which announced a conference in Istanbul and then upgraded 3 days before the conference, are inappropriate because the Moody’s conference was originally announced during the summer.
  • They said they would “consider upgrading Turkey’s rating if the government made further progress in lowering its external vulnerabilities by structurally reducing its current account deficit, increasing foreign exchange reserves or reducing the private sector’s external borrowing”. None of these conditions is met.


  • The rating agency could claim the decline in the deficit (although it is not structural) and the increase in reserves (although it is because of the rise in banks’ deposits at the Central Bank as a result of ROCs) as proof that two of its conditions have been met.

With Moody’s, it is also important to note that markets have been very moody with the rating agency. Moody’s has basically been saying the same thing about the Turkish economy for the past couple of months. So there is really no reason for you to have changed your mind at all if you thought Turkey would/would not be upgraded. But markets have swung wildly on Moody’s expectations of upgrade/no upgrade recently…

My final say is that it is a really close call with the Central Bank, not such a close one with Moody’s- i.e. I am much more comfortable with my Moody’s call than the rate one. We’ll see tomorrow if I am right on the latter, but I expect a rise in the ultra-low bond rates (see graph above) if I am…

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