Fitch hints at investment grade Xmas present for Turkey

By bne IntelliNews October 11, 2012

bne -

Turkey's slowing economy could be about to gift the government what it craves - an upgrade to investment grade - after a director at Fitch Ratings said on October 10 that the agency is set to review its 'BB+' rating on the sovereign before the end of the year.

Speaking at a conference in London, Paul Rawkins, head of emerging market European sovereigns, said Fitch is "quite close" to reviewing Turkey's rating, reports Bloomberg. While he offered no promise that the review would move the rating one notch higher needed to make investment grade, Fitch already said in August that it could offer an upgrade should inflation slow and the current account deficit narrow to a more sustainable level, moves that are slowly materializing.

Rawkins also stated that geopolitical tensions aren't currently a risk for the country, although he warned that the situation could affect Fitch's view if it deteriorates. "If Turkey got dragged in [to the Syrian conflict], that would have implications," Rawkins said. Turkey is a stable story with "strong" public finances, and the Syria conflict is "not having huge impact" on the budget, he added, according to the Wall Street Journal.

The markets welcomed the news, with the lira jumping 0.4% by mid-afternoon trade following a slump last week when Turkey and Syria fired at one another across the border. However, bond yields remained unmoved.

Disagreement

Ankara has been at loggerheads with the rating agencies over their refusal to give the country an investment grade, with officials regularly accusing them of membership in a cartel of market players depressing Turkish assets for their own profit. However, the markets remain concerned because of - rather than despite - the galloping 8.5% GDP growth recorded in 2011.

Much of that expansion was based on rampant domestic demand, leaving the economy dangerously out of whack. A current account deficit that hit double figures saw Turkey hugely exposed to the Eurozone crisis, with the vast bulk of funding to fill the hole sourced from Europe's precarious banking sector. The overheating last year also sent inflation soaring.

This year, however, the economy is decelerating, which has pushed the current account deficit towards 7%, while inflation, although still sticky, is also slowing. Meanwhile, the country's budget deficit target of 2.3% of GDP for 2012, and 2.3% for next year, is healthy compared with an average of 5.3% in the Eurozone.

That has the ratings agencies reconsidering. Fitch praised the slowdown, and a "remarkable" boom in exports to the Middle East, in August, and said it could soon review its rating - which currently has a stable outlook - should the country achieve a "soft landing". Moody's, which rates the country one level below investment grade, said on October 8 it will reassess Turkey if fragility is reduced. Standard and Poor's rates the nation BB, two levels below investment grade, notes Bloomberg.

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