Nothing standard or poor about S&P's Turkey decision

The decision of credit rating agency (CRA) Standard and Poor?s to downgrade its local currency ratings on Turkey on the evening of May 8 made me wish Admiral Zafer ?Patek Philippe? Ça?layan was still the Economy Minister.

Ça?layan, who had to resign after the graft scandal, loved wordplays on the names of CRAs. After a decision by Fitch that he did not particularly like, he said that the rating agency had done ?its Fitch thing? again, implicitly referring to a well-known Turkish swearword that sounds like ?pitch? in English. He may have found this latest decision ?standard and poor.?

Or he could have chosen to keep quiet. After all, local currency ratings are not as important as foreign currency ratings. Moreover, the latter are rated one notch above investment grade by S&P?s competitors Moody?s and Fitch. A country needs to be rated investment grade (IG) or above by at least two CRAs in order to be deemed IG by funds, so Turkish officials probably did not lose any sleep over S&P?s decision.

Regardless, the short note accompanying the announcement makes three important points: First, S&P has based the ratings cut on what it ?consider[s] to be increasing curbs on the operational independence of Turkey?s central bank, which in [its] opinion have made it more challenging for the monetary authority to credibly fulfill its price stability mandate and to dampen the impact of exchange rate volatility on the economy?s growth prospects.?

S&P is also warning about the rise in foreign currency (FX) deposits. According to the latest data, FX deposits rose more than $4 billion during the last week of April after hovering around $138 billion for several weeks. Dollarization decreases the effectiveness of monetary policy, which,...