S&P dashes Turkey’s hopes, again

Turkey’s relations with Standard & Poor’s (S&P) have been marred by tensions since 2012, when the credit-rating agency dealt Ankara a major blow. Here's the story of how the two sides became at loggerheads:

The Turkish economy grew 8.5% in 2011, the highest growth rate in the Organization for Economic Cooperation and Development (OECD) and the second-highest after China in the G-20 group of industrialized nations. The government expected a rating upgrade. But in a move that shocked Ankara, S&P downgraded Turkey’s outlook from “positive” to “stable” on May 1, 2012. Government officials responded in the harshest terms, scrambling to punish S&P.

Prime Minister Recep Tayyip Erdogan was the first to signal that Ankara would cancel S&P’s contract with the Turkish treasury. Furious, he grumbled, “The figures speak for themselves. The level of production, export and growth is self-evident. So, even if you lower the grade to ‘stable’ no one would buy it. I no longer recognize you as a credit-rating agency.” Erdogan went as far as to claim, “Turkey will set up its own credit-rating agency.”

Then Economy Minister Zafer Caglayan said, “S&P has shot itself in the foot and lost its credibility.”

In response to Turkey’s threats, S&P’s Global Head of Analytics and Operations, Paul Coughlin, noted that France had pulled out from its rating agreement in 2000, but the agency continued to grade the country. S&P, he stressed, will continue to grade countries that unilaterally cancel their credit-rating agreements or countries and companies that refuse to make such agreements.

At the end of 2012, the Turkish treasury did terminate S&P’s contract. Commenting on the move Jan. 16, 2013, Caglayan said, “The treasury is free to work with the companies of its choice. I don’t think it aimed to bring credit agencies to their senses. But I do hope they will come to their senses.”

Following the termination of the contract, S&P continued to analyze Turkey for its clients. Then, some important developments took place. On Nov. 5, 2012, about six months after S&P downgraded Turkey’s outlook, Fitch raised the country to investment grade, followed by Moody’s, which did the same on May 16, 2013. Soon, the Japan Credit Rating Agency (JCR) followed suit, raising Turkey to a grade of BBB-, its fit-for-investment rating.

Keeping up with the trend, S&P also upgraded Turkey on March 27, 2013. Yet it raised it only to BB+, the level just below investment grade, while calling its outlook “stable.”

The upgrade failed to satisfy Ankara, for S&P had continued to give Turkey the lowest ratings, dashing its hopes for an investment grade. The agency, however, did not stop there and further stunned Ankara on Feb. 6 when it downgraded the country’s outlook from “stable” to “negative.” Three months later, on April 28, S&P came up with a fresh statement, declaring its macroeconomic projections for Turkey for 2014 and 2015 as positive.

Following those zigzagging assessments, a dazed Ankara faced another critical review on May 23. And in yet another surprising move, S&P kept the country’s outlook at “negative” and affirmed its rating as BB+, dashing expectations the agency would upgrade the outlook to “stable” following its positive projection of April 28.

The agency’s report said Turkey’s resilience to external shocks had become less manageable and sharp economic downturn could lead to a downgrade of its credit rating. The warning is an indication that Turkey’s rating could be lowered in the next year and a half.

In sum, the chill between S&P and the Turkish government is unlikely to go in the short run, for the tensions have gone beyond the issue of rating.

Editor's Note: This piece has been updated with the news of S&P decision not to give Turkey an unpward revision.