OPINION – How did S&P lose its credibility?

By Gokhan Kurtaran

LONDON

U.S.-based Standard & Poor’s has substantially overshadowed its credibility after making questionable decisions on Turkey in recent years. The question now is whether this is due to economic reasons or political revenge?

Not only politicians are criticizing the S&P’s decisions on Turkey that depict its “bias”, but also experts in international financial markets are voicing their concerns.

The S&P had hastily cut Turkey’s credit rating from BB+ to BB without preparing a situational analysis and projection report; it also marked the country’s outlook to negative after the July 15 coup attempt, bringing doubt to the credibility of this major rating agency.

It seems the S&P is, unfortunately, once again releasing its assessment under the name of “political risk”, even though its political reflexes do not have a rational basis. Over the recent developments, even financial experts in London are expressing similar concerns.

Timothy Ash, a strategist at the Nomura EMEA, told Anadolu Agency in London last week the decision to cut the rating for Turkey was "interesting,” adding that credit rating agencies were being cautious and negative against Turkey.

But why is one of the world's largest rating agencies, the S&P, displaying such a biased attitude against Turkey?

If we examine the circumstances from 2011, it would be useful to understand that this rating agency has moved away from economic realities to political arguments.

I have been following international rating agencies for eight years. Prior to my appointment in London, I had been discussing with experts who write reports for Fitch, Moody’s, and Standard & Poor’s during the most critical times. One of the main features of such experts is to give explanatory answers when you ask them rational questions. This is helpful to find out errors and deficiencies in the reports. Considering the reviews, each new country report is published in a more inclusive manner compared to the previous one. Respectability of the analysts and the rating agencies are measured by these reports that have been prepared in six to eight months.

But the tone of the S&P reports has been getting negative in the last five years in a strange way. Political risk emphasis has overtaken the basic financial ratios and economic outlook. So much so that I saw the S&P’s discomfort over the quotation saying, “The minimum wage increase would positively affect economic growth” in the interview that we did.

We discussed this issue with the contact person in Frankfurt for days. He said it would not be appropriate in this statement. I noted the phrase in the news was in the quotation, as well as the text of the interview was approved by the holder via e-mail, and the news was published. Today, I still have this correspondence. It was quite interesting since they wanted to withdraw the only positive expression (about Turkey) in that interview.

Turkey’s growth momentum not seen

The key question is: How did S&P come to this point? Why is the agency, which rates nearly 127 countries, putting its credibility at risk? Why is it moving away from rational grounds?

In September 2011, the S&P opened its office in Istanbul with the participation of several finance journalists including me; Zeynep Holmes, country manager for Turkey, and Frank Gill, director of European Sovereign Ratings at Standard & Poor’s also attended the opening ceremony.

During that event, executives had pointed out the “rapid development and high potential in Turkey” as one of the reasons for opening the Istanbul office. But for some reason, the S&P at that time did not see a decline of the current account deficit, and a continuation of growth momentum in Turkey.

While the S&P’s rivals, Fitch Ratings and Moody’s were upgrading Turkey’s credit note to “investable” level, the S&P remained isolated and decomposed in time.

Firstly, the international rating agency Fitch upgraded Turkey’s investment grade to “investable” level on Nov. 5, 2012. Next, Moody’s announced it was upgrading Turkey’s grade to “investable” level on May 16, 2013 as it had been increased by one step in the rating scale. But the S&P kept its credit note at an irrational level with its excuse of political risk and current account deficit in the country.

Lasting relations

Let’s remember those days when Turkey grew by 8.5 percent in 2011; it was in the lead among the Organization for Economic Co-operation and Development (OECD) countries while it rose to second place after China among G-20, world's largest economies.

However, for some reason, the S&P downgraded Turkey’s “positive” outlook to “stable” on May 1, 2012. This decision hurt ties between Turkey and S&P; it has been also strongly criticized by the management of the economy.

First signal about the cancellation of agreement between Turkey and S&P had been sent by the Turkish prime minister at that time, Recep Tayyip Erdogan, who asked: “What is your basis to downgrade it to stable level? Because, [the outlook] of a country, which keeps its position at positive for a while, should be increased; however, they are thinking that if Turkey’s note rose, it would bother us; so, we keep it stable. On the other hand, it raised the note of bankrupt country Greece. What nonsense? [This was] purely an ideological approach.”

The S&P’s senior managers had visited Turkey in May 2012 to repair strained relations. The economy writers of all newspapers and agencies had attended this meeting. The S&P managers told us how they evaluated Turkey.

We asked them to have a private interview in Istanbul since we thought this press conference was not an end, but it would be a beginning of strained relations. When I arrived at the hotel, I met with Paul Coughlin, the executive managing director of global analytics and operations at S&P. We asked him the question our colleagues did not ask on that day: “What would happen if Turkey withdraws its existing agreement [with S&P]?”

Coughlin, who answered our questions kindly, said in case of cancellation of agreement, the S&P would continue to evaluate Turkey with “unsolicited” note; as exemplifying: “Sometimes, the companies and the countries could cancel the agreements with us…But, we continue to evaluate 127 countries. France withdrew from the rating agreement in 2000. We still continue to grade France.”

Turkey declared in 2013 that it had canceled its agreement with the S&P. Although the S&P upgraded Turkey’s note from BB to BB+ on March 27, 2013, this rating was one point under the “investable” level the S&P’s rivals did before.

On Feb. 6, 2014, the unexpected note decision came from the S&P. Turkey’s outlook was lowered to “negative” from “stable”. The last rating decision came in May 2016. This time, the S&P confirmed Turkey’s BB+ credit note, and raised the outlook as “stable”. In short, Turkey’s credit note had been always kept under the “investable” level.

What was said, what was done?

Two months ago, what did the S&P say about Turkey’s rating? It is worth remembering the interview that we did with Trevor Cullinan, the director of sovereign rating at the agency, about Turkey’s economic outlook.

“Turkey showed relatively strong growth in 2015. It grew stronger than we expected,” Cullinan had said in the interview. When we reminded him about the S&P’s reports, themed with risk of “abrupt halt”, he said: “We had concerns about external financing could be halted suddenly. But this did not happen. That is why we turned Turkey’s outlook to ‘stable’ from ‘negative’”.

This is a moment one should pause and think about. The S&P had emphasized an “abrupt halt” for Turkey in previous reports; however for some reason, the agency could not foresee 4 percent growth in 2015. Here, it was not a small margin of error; it was a big error of estimation.

Cullinan, who had begun to prepare Turkey’s reports recently, said: “Turkey showed relatively strong growth in 2015. It grew stronger than we expected. This growth has been substantiated despite regional instability, weakness in emerging market perception, and last year’s election cycle.”

After the July 15 failed coup by the terrorist organization FETO, the S&P said it had downgraded Turkey’s credit note to BB from BB+, and lowered the outlook to “negative” from “stable”.

The S&P’s statement said: “We expect that given the political uncertainty, Turkey’s policymakers will likely stray from their commitment to enact reforms intended to wean the economy away from its dependence on foreign financing.”

In fact, after the coup attempt, the Turkish Central Bank acted quickly and took a series of measures before opening of the market. Deputy Prime Minister Mehmet Simsek gave reassuring comments on the market. However, the S&P ignored all such remarks although these were expressed clearly.

Looking at real picture

Based on fiscal ratios, Turkey overtakes many countries, which have “investable” credit note. The countries, which have “BBB-“, “BBB” and “BBB+” credit notes, are in “investable” levels such as India, Italy, Kazakhstan, Oman, Romania, South Africa, Philippians, Uruguay, Iceland, Panama, Peru, Poland, Spain and Thailand.

Considering the aforementioned countries, this year, Turkey with an estimated $751.2 billion economic size overtook India, Italy and Spain. Turkey’s estimated growth rate in 2016 is also higher than all these countries except Iceland, India and Romania.

Turkey’s GDP is 15-fold bigger than Croatia, yet it has been evaluated by the S&P in the same group as Turkey. Also Brazil remained behind Turkey’s growth table even though Brazil has a bigger economic size than Turkey.

In an era of increased concerns about global demands, it is estimated that Turkey’s GDP would be increased to 3.8 percent as Turkey's growth was 4.8 percent in the first quarter of this year; while it is estimated that Brazil is expected to shrink 3.8 percent in 2016; Croatia is expected to grow 1.9 percent in same period.

Surprisingly, but real. We are trying to find the truth amid contradictory statements. The reports, projections somehow are always wrong, but fiscal ratios are continuing to show us that investors give the picture of real Turkey.

Maybe, one day, the S&P will also see this picture.

- Opinions expressed in this piece are the author’s own and do not necessarily reflect Anadolu Agency's editorial policy.