Turkish financial markets shrugged off a ratings downgrade yesterday as the country heads into the final stretch before the June 24 snap elections. Standard and Poors's ratings cut from BB/B to BB-/B was largely ignored by markets. The benchmark BIST 30 index was unchanged by the end of the first session of trading as the Turkish lira traded down 0.3 percent against the U.S. dollar at noontime yesterday.
Theories on why markets ignored S&P's rate cut vary. After discussing the issue with several institutional investors, some commented that they believe the S&P leaked the news late Monday before the Tuesday May 1st holiday, allowing rogue traders to illegally trade on insider information. The BIST 30 was down nearly 3 percent in the final hour of trading on no news raising suspicions of insider information being used by those with a "heads up" from S&P. Short of this explanation, the drop on Monday in the final hour of trading before the S&P announcement must be chalked up to - an unlikely - pure coincidence.
While S&P has always been the most negative of the ratings agencies in terms of Turkey's sovereign debt rating, Tuesday's announcement was no shock. The U.S. dollar has rallied recently against nearly all other global currencies in the last few weeks hitting 3-4 month highs across the board. The Japanese Yen currently trades at a 3 month low against the dollar, while the Euro is at 3.5-month lows, and the Swiss Franc is at 7 month lows. Global dollar strength especially hurts Turkey as its energy dependence forces it to import U.S. dollar denominated energy and other commodities. This in turn raises local prices throughout the country, and inflation pressures continue to mount.
The S&P report stated the obvious in pointing out these systemic issues with Turkish financial markets without addressing much of the improvement in export figures for the country. On an annual basis exports were up over 10 percent with a 15 percent increase in the month of April alone. Increased exports will be key to Turkey's turning its economic picture around, while increasing the value-added nature of these exports will be even more important than an increase in the nominal figures themselves.
While Turkey is undoubtedly held back by many fundamental problems, legacy issues with the educational system are the most notable. A cookie-cutter approach to school curricula implemented in the same way throughout the country, including a mandate that even private schools adhere to the same curriculum, has left Turkey behind its emerging market peers. Teachers are given little leeway to tailor the curriculum to their students and are simultaneously granted employment for life, giving them zero incentive to improve. The Turkish government has for 90 plus years exercised a top-to-bottom approach to education, and at some point a complete overhaul will be unavoidable. Without an immediate adoption of these necessary changes, Turkey is only continuing to sow the seeds for future financial woes as it has been doing throughout its 95-year history.