Recently, the Istanbul Stock Exchange Index is rallying toward a record with the expectation of a possible “country rating upgrade”.
But, how would the upgrading of the country credit rating to “Investment Grade” effect the players of the Turkish Insurance Market?
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In 2003, one of my friends, who owned one of the nice butique hotels of Urgup, was asking 2 million USD to sell his hotel. In 2012, the price was10 million USD for the same hotel.
The hotel was the same hotel, the revenue (in terms of USD) was more or less at a similar level.
Difference;
- There are more liquidity and more buyers in the market.
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It is a certainty that more money will flow to Turkey in the case of a possible rating upgrade. It is also certain that cheaper funds will be available for new companies to be established in the country, but the foreign investment will flow more to the already established businesses.
While the existence and the number of these companies in the country is known, how will the increase in demand to acquire or investment in these companies effect the market?
The value of the companies will increase quickly despite the fact that there will not be any changes in their operations. A company with a market value of 1 million TL will be worth 5 million TL or 10 million TL shortly with the increasing demand and liquidity.
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The increase in value will not be limited to those companies; it will spread to all sectors, goods and services, and will continue until a new and higher demand/supply balance.
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The negative consequences regarding rating upgrade mentioned below should be considered alongside the positive expectations that is created these days in the financial markets.
In Brazil, following the credit rating upgrade, the interest rates seemed attractive to investors and the Direct Foreign Investment increased to 66.7 billion USD in 2011 from 48.5 billion USD in 2010. (*)
With the quick increase in foreign investment, the Brezilian currency appreciated against USD, resulting in a decrease in the competitive advantage of this country (in exports and production), and as a result, the Brezilian Government felt the necessity to impose new taxes as a protection against the negative consequences of increased cash flow.
(*)Source: CIA The World Factbook.
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Wıth the upgrade of the country credit rating, short term effects on the insurance industry can be expected as follows;
- The increase in insurable value of goods & services will primarily increase premiums and consequently claims costs,
- Values of companies in the insurance market (insurance companies, brokers, agencies) will also increase,
- More companies will find new buyers,
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Despite increase in personal wealth of some individuals, the purchasing power of the new value created at the higher price level will weaken.
In my opinion, the worst case for companies and individual could be to be in full liqudity instead of all other kind of investment in such an upgrade.