THE ROLE OF SOVEREIGN CREDIT RATINGS IN TURKEY

Credit Rating - Moodys - S& P - Fitch-749500 (2)     

 A credit rating is an evaluation of the credit worthiness of a debtor (a business (company) or a government) predicting the debtor’s ability to pay back the debt; it thus forecasts implicitly the likelihood of the debtor’s default. The credit rating represents the evaluation of the credit rating agency of qualitative and quantitative information for the debtor; including non-public information obtained by the credit rating agencies’ analysts.  Source : WIKIPEDIA

Turkey  is  an  illustrative  example  to  study  the  role  of  sovereign  risk  in  emerging  market economies because she is characterized  by  high  inflation  rates,  high nominal  interest  rates  and  a  (perceived)  risk  of  sovereign debt default, combined with  the inability to borrow from abroad  in  their own currency. Turkey’s credit rating changes between speculative and highly speculative investment grade and includes high risk obligations. The reasons for ratings adjustments vary, and may be broadly related to overall shifts in the economy or business environment or more narrowly focused on  circumstances affecting a specific industry, entity, or individual debt issue. As a developing country, Turkey felt the impact of public budget crisis on a limited scale. The  fiscal discipline (tight fiscal policy) secured following the 2001 crisis played a major role in achieving this. The public finance indicators reveal that as of 2010 Turkey demonstrates a better outlook than almost all developed countries. It is observed that the budget and primary balance  and  indebtedness  ratio  figures  for Turkey  are  better  than  those  of  the  Eurozone countries recently encountering problems.    

On the other hand, while the public finance indicators for Turkey demonstrate a better outlook  compared to developed countries, its sovereign rating  is yet not as high as the  investment  grade. Despite the improvement in the public finance indicators, Ireland, Portugal and Spain still have better positions than Turkey in terms of credit ranking. It  is seen  that  in  the  last decade,  changes in sovereign rating and in budget , primary balance indicators as well as public debt ratio have not moved   in  the same direction as  would be expected. However, I can  say  that many countries with  sovereign  ratings of AAA  have  higher  budget deficits and public debt  ratios  than  Turkey. Several countries with lower sovereign ratings than Turkey also appear to have lower budget deficits and public debt ratios than Turkey.  The budget and primary  balance  and  the  debt  ratios  alone  are  not sufficient  in explaining  the changes  in  sovereign  ratings. Higher inflation rates may imply a sovereign borrower’s implementation of reckless policies (eg. Excessive spending and borrowing) and this would lead to higher default risk. As we know , this  rate has  reached  three  digit  level  in  1994,  currency crisis.   Turkey has a highly unfavorable outlook considering the current account deficit that  tends  upwards  along  with  the  economic  recovery  and  the  economic  growth  and  real exchange  rate volatility which  is of critical  importance  for public debt dynamics. It can be maintained that the fact that a significant proportion of the public debt is denominated in or indexed to foreign exchange is a great impediment to a rise in the sovereign rating.   

In general, main reasons of the crisis in Turkey, public debt was not sustainable in an  environment  of  high and  volatile    inflation   as   well    as   instable    growth  performance, and    structural  problems   could   not   be  solved   permanently   especially    in  financial markets. Increasing instabilities in economy caused maturity to shorten for   the investors and savings, dollarization and the fragilities of Turkish economy increased.  The  increase  in  public  sector  borrowing  requirement  put  pressure  on  domestic  markets.  Economic and politic uncertainties prevented the Treasury to borrow with longer maturity and  at more  favorable  interest  rates. The shortening  in  maturity  and  the  rise  in  interest  rates became  more  significant  during  crisis  periods. Low level of domestic savings negatively affected the development of financial markets. Unfortunately, developing countries, like Turkey, often make a choice between high growth rate and current account deficit because these countries have to import energy and capital goods. On the other hand, technological recovery is not sufficient in developing countries. Thus, to  overcome  this  handicap,  developing  countries; for  example  Turkey,  have  to  increase  tendency  to  saving  and investment. While change in credit rating was causing increase in borrowing costs from global markets for public and private sector, it has negatively affected the foreign capital inflows to Turkey. For example, after Turkey’s general election on 7th June 2015,  Turkey has faced a new political reality and  the turkish lira dropped to record low.  Rating agency Fitch has said ‘Political Uncertainty’ in Turkey could increase risk the country’s sovereign credit profile, but said that the possibility also depends on how policy-making is affected. Even though the rating agencies don’t seem focus on  much more political uncertainty for credit ratings scale when they identify, they extremely care about it.      

                                                                                                

Dollar Interest Rates Swap / Charts

 Interest Rate Swap 1 Year  

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Interest Rate Swap 5 Year

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Interest Rate Swap 10 Year    

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Interest Rate Swap 30 Year

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Source: FRED

The interest rate swap rate is the fixed rate that is paid on an interest rate swap to receive payments based on a floating rate.
10 Year US Swap Rate  at 2.32% compared to 2.23% the previous market day and 2.62% last year. This is lower than the long term average of 4.06% .

DEFINITION of ‘Interest Rate Swap’

An agreement between two parties (known as counterparties) where one stream of future interest payments is exchanged for another based on a specified principal amount. Interest rate swaps often exchange a fixed payment for a floating payment that is linked to an interest rate (most often the LIBOR). A company will typically use interest rate swaps to limit or manage exposure to fluctuations in interest rates, or to obtain a marginally lower interest rate than it would have been able to get without the swap.

Read more: http://www.investopedia.com/terms/i/interestrateswap.asp#ixzz3cCFwWvVj