By Robert M Cutler
MONTREAL - Zioconned Turkey takes understandable pride in its strong economic growth, which explains in part the government's angry reaction to the downward revision by Standard & Poor's (S&P) this month of its ratings outlook for the country.
Prime Minister Recep Tayyip Erdogan responded: "This is totally an ideological approach. No one can believe this. You cannot fool Tayyip Erdogan. Why? Because I have a developing country." Erdogan said Turkey might announce that "it does not recognize S&P as a credit rating institution".
S&P cited concerns about external demand and terms of trade in revising its prospects for Turkey's long-term foreign and local currency sovereign credit. Rubbing salt in Turkey's wound, S&P
Turkey's economy "is fairly closed, with exports accounting for a small share of GDP (about 24% in 2011)", S&P said, referring to gross domestic product. It noted the current account deficit is large and highly dependent on short-term financing from outside Turkey. As a result, the country is particularly vulnerable to sudden financial account outflows and refinancing risks, S&P warned.
The Turkish economy expanded 8.5% last year, and according to the World Bank, its recent growth rate is second only to China's. Since 1980, the country, like China, been transformed, with GDP surging to US$700 billion from $70 billion and exports growing to $300 billion from $3 billion. It is now the world's 16th largest economy.
Most recently, foreign direct investment rose 25% in the first two months of the year, to $1.7 billion in the period, while the Purchasing Managers' Index in April stood at 52.3, up from 49.6 a month earlier. A figure over 50 indicates economic expansion, and under 50 contraction. Industrial production expanded 4.4% year-on-year last month. In March, the foreign trade deficit fell 25.3% year-on-year.
Even so, negative signs are all too evident. Inflation climbed to 11.1% in April, the highest in three-and-a-half years, while the foreign trade deficit for the first three months of the year is down only 17.5% from the first quarter of 2011.
A planned Turkish health tax on cigarettes, which would increase tobacco prices 24%, will further drive up inflation, increasing the inflation rate by 1.2 percentage points this year, Bloomberg reported, citing a report by BGC Partners' chief economist, Ozgur Altug.
Turkey is also suffering from Europe's economic woes, where austerity policies are hurting demand. The European Union's share of Turkish exports fell to 42.3% in the first quarter from 48.3% a year earlier, while EU exports as a proportion of Turkish imports declined slightly, to 26.9% from 37.8%.
The country's current account deficit, though down from $6 billion a year earlier, was still a high $4.2 billion in February, and while energy's share of the deficit and of the trade deficit have declined in recent months, oil and gas are still 20% of all imports and 50% of the current-account deficit.
Gas accounts for 50% of Turkey's electricity generation and 31% of the primary energy supply (oil accounts for 28%). There is an intimate relationship between Turkish growth and the sustainability of energy supply. In particular, Turkey is a relatively energy-intensive economy, which takes a disproportionate hit when global energy prices rise.
Every $1,000 of Turkish GDP requires 0.26 ton of oil equivalent, whereas the average for the 34 developed countries that are members of the Organization for Economic Cooperation and Development is 0.18. Energy demand and electricity demand may continue to grow as much as 7% per year as they have done recently.
The World Bank estimates that a possible 27% in energy savings is possible through retrofitting residential buildings and industrial plants. This could save the equivalent of over 100 million barrels of oil per year, or 20% of the country's average annual imports.
The economy will also gain if the proposed Trans-Anatolian Gas Pipeline (TAGP, also called TANAP after its initials in Turkish) is implemented, carrying natural gas from Azerbaijan's offshore Shah Deniz deposit. Azerbaijan is set to become the largest foreign investor in Turkey as principal owner of the TAGP, along with which it is also building petrochemical complexes and associated infrastructure.
Despite the negative side of the economy, aggrieved Erdogan is not alone in thinking S&P wrong in its outlook.
"Turkey has not defaulted [on its debt], was not subject to financial restructuring and is a powerful country with strong repayment ability," said RBS global head of emerging market research and strategy Timothy Ash, the comparison with debt-hit Greece implicit.
"Certainly it deserves a better grade ... Turkey continued fulfilling its responsibilities [vis-a-vis its creditors] even after the 2001 crisis. International markets consider Turkey already at investment country status. So one of these must be wrong, either the markets or the credit rating agencies."
Last June, Saruhan Ozel, chief economist of Turkey's Denizbank, noted that lenders received higher returns in lending to countries with lower credit ratings. (The lower rating indicates increased risk.)
"For a lot of corporate investors, countries like Turkey that are repaying all their debts on time without any problems but whose credit ratings are insistently kept below investment grade are valuable. By lending to them, they are making very good money," Ozel wrote in the Zaman newspaper.
Dr Robert M Cutler (http://www.robertcutler.org), educated at the Massachusetts Institute of Technology and The University of Michigan.