The possibility of a change to Turkey’s credit rating, part II

Originally commissioned by Hologram Network Political Stability Intelligence in January 2014

Summary: The possibility of a downgrade to Turkey’s credit rating is high. This is due to the support that companies close to the ruling party receive from the state, which has allowed them to rack up debts and obtain advantageous positions, disproportionate to their integrity as organizations.

During late 2012 and early 2013, we reported that a number of credit rating agencies were considering upgrading Turkey’s credit rating to a positive outlook and our prediction was proven true shortly after our report came out. Although the relevant economic stability factors, as determined by our index, seemed positive compared to those of other countries, we predicted that they would worsen and, therefore, we expected that the new upgrade would not be not be justified. This was also supported by the political stability factors, as determined by our index, which did not seem to support any upgrade. The growing negative perceptions of political developments in Turkey during that period are now widely accepted and our predictions were again proven correct.

Throughout that period, late 2012 and all of 2013, the strength of the Turkish economy gradually began to decrease. In absolute economic terms, these severe negative aspects seem unlikely to have concrete negative outcomes for households, companies, the banking sector or public finances but rather will result in slight deteriorations in the health of these different areas. Aside from structural or operational issues, the main reason for the weakening of Turkey’s economy is the high foreign exchange debt of the real sector and the fact that there have been attempts on the part of state actors to conceal the extent of this debt. The private real sector’s debt has been portrayed as 170 billion USD, when in fact it is closer to 270 billion USD. In the officially presented figures, the foreign exchange surplus held by a handful of large, well-managed companies in Turkey, 100 billion USD, is deducted from the overall debt.


Even though combining these two areas of debt (the foreign exchange surplus and foreign debt) seems correct from an economic point of view, it is faulty when seen from the perspective of political economy, as it masks certain political realities. Most of the companies with a foreign exchange surplus are ones that are already dominant in the Turkish economy. These companies tend to have good connections with respected multi-nationals, and their positioning in global networks and supply chains is good.

However, these companies with high levels of foreign debt are quite different from the above-mentioned companies that hold a foreign exchange surplus. These companies with high foreign debts have an interesting similarity: they tend, for the most part, to be closer to the government. The relations of these companies that have a high level of foreign debt with government institutions seem to be strong and positive. These relations are remarkable and range from the success these companies enjoy in public biddings, to the way the state facilitates their imports and the support they receive in the development and real estate industry. The companies in this group produce a small proportion of the national income, despite bearing a higher percentage of the debt burden. The above-mentioned advantages that these groups enjoy in this respect have led to their accumulation of a high level of foreign debt.

The key problem for the Turkish economy seems to be its foreign exchange deficit in the real sector, however, the outputs of the companies, which share the largest portion of the foreign debt of the real sector, are rather low and their profitability is not proportionate to their debts; therefore, they have become a heavy burden on the economy and the public due to their operations, when compared to the resources they utilize. While not directly related to the issue at hand, it is revealing that a number of these companies that are close to the government are being closely monitored by the International Financial Action Task Force (FAFT). The companies in question have not been successful in establishing the sort of long-term, healthy export agreements that more healthily functioning Turkish companies have, as they operate in labor-intensive industries and, relatively speaking, do not operate within particularly secure business fields. Their investment areas are rather speculative. Similar patterns are seen in Japan, South Korea, North Korea and China but the difference is that those companies are profitable and productive, despite the prevalence of questionable practices.


From a macroeconomic perspective, it is crucial the Central Bank change its focus. Rather than focusing on the sensitiveness of the real sector to the foreign exchange deficit, assisting government interventions in determining foreign exchange rates or preventing changes in the rate of inflation, the focus of the Central Bank should be on reducing the operations of the above-mentioned groups or even seeking to hold them accountable for their actions. That the Central Bank has not done this is unlikely to be a question of ignorance. The critical question here is whether the dynamics can be maintained that are required to reduce or even negate the damage that has been done due to the foreign debt of the above-mentioned companies.

The extent to which the government, the civil service, the banking sector and the media have been following the issue of the above-mentioned companies’ high level of foreign debt has been low or even negligible, either due to ignorance or complicity. If state actors, the media and actors in the finance sector do not work to undermine the dominance of these groups, expose their damaging practices and break their ties of complicity with the government in line with democratic norms, the exchange rate will continue to rise. It is highly unlikely that these groups will come together, but rather their attitudes towards each other are likely to remain hostile. The basic mechanism behind the high likelihood of a negative outlook for Turkey’s credit rating is not a purely political-economic one. The likelihood of the negative rating stems to a large extent from the activity of the above-mentioned networks of business interests that are heavily involved in the economy thanks to their closeness to the government, despite their ineffectiveness as businesses and despite their heavy indebtedness.

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