Last updated: November 5, 2012 5:02 pm

Fitch raises Turkey to investment grade

Turkey has been raised to investment grade by Fitch, the rating agency, a move that comes after almost two decades of sub-investment ratings and which had long been sought by the country’s government and private sector. The ISE 100 index in Istanbul climbed 1.8 per cent to a record high, while the lira and Turkish bonds rallied.

Fitch’s decision to upgrade the country’s long-term foreign debt to BBB- from BB+ is in effect a vote of confidence in Turkish officials’ efforts to rebalance the economy away from the breakneck growth of recent years and towards a more export-driven rather than domestic-led demand model.

“Fitch believes that the Turkish economy is on track to return to a sustainable growth rate, having narrowed the current account deficit and lowered inflation after overheating in 2011,” the agency said in a statement.

“At some point, an external financing shock and a recession are likely. However, the agency believes the country’s strong sovereign, bank and household balance sheets, and economic and exchange rate flexibility provide important buffers against shocks spreading into a wider financial crisis.”

Ankara hopes Fitch’s decision will be followed by the two other big agencies, both of which have Turkey on the verge of investment grade, moves that would allow a wide range of institutions, such as pensions funds, to start investing.

But Moody’s Investors Service said last month that Turkey needed to be more resilient to balance of payments shocks if it was to attain investment grade, while in May Standard & Poor’s cut its outlook for Turkish sovereign debt from positive to stable - indicating any upgrade over the succeeding 12 months as unlikely. No rating agency had previously given Ankara investment grade since Moody’s downgraded the country in 1994.

Mehmet Simsek, Turkey’s finance minister, welcomed Fitch’s upgrade, saying on Twitter that it was the result of political and macroeconomic stability during the current government’s decade in office, following years of crisis.

“The credit rating upgrade to investment grade will support our growth forecasts and will even increase our growth performance,” Mr Simsek said, referring to Ankara’s plans for 5 per cent annual growth by 2014, compared with a level of about 3 per cent today.

Ed Parker, managing director at Fitch, said the upgrade reflected the underlying improvement in the country’s balance of payments, noting that while the move could open Turkey up to a wider pool of investments, “Turkish financial markets [have already] had a good run in recent months.”

Fitch said the country’s external finances “remain a key rating weakness”, highlighting it expected this year’s current account deficit to total $58bn or 7.3 per cent of GDP.

In a nod to the political tensions facing Turkey over the fighting in its neighbour Syria – with which Ankara has frequently exchanged cross-border fire in recent weeks – Fitch said it was assuming the country would not be drawn into a “full-scale military conflict”, an event that could lead to a downgrade.

It also assumed that Turkey would not be suspended from its membership in the inter-governmental Financial Action Task Force in an o dispute over Ankara’s failure to pass and implement terrorist financing legislation – or that if the country was suspended, that it would “not precipitate countermeasures that materially adversely affect the capacity of Turkish entities to access international financing”.

In a move that gave Turkey some months to resolve the dispute, FATF agreed last month to suspend Turkish membership effective from February next year. FATF has also sought to distinguish Turkey’s membership of the group from its international blacklist, which at present only includes North Korea and Iran, and has helped to isolate both Pyongyang and Tehran.

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