Turkey still not highly rated

By bne IntelliNews October 13, 2010

Justin Vela in Skopje -

On October 5, Moody's Investors Service raised the outlook for Turkey's 'Ba2' rating from stable to positive due to the country's economic and fiscal resilience, implying a ratings increase is on the cards. But the country still faces a host of challenges that will have to be met before it is rated at the level of other emerging markets in the region.

The same day the outlook was upgraded, Moody's also raised Turkey's economic growth forecast to 6.5% for 2010 and 5% for 2011. Following this, the Turkish lira hit its highest level in more than a year at 1.4340 to the dollar. Already drawing lots of attention for its impressive growth levels, 11.7% in the first quarter and 10.3% in the second quarter from the year before, Turkey's markets are far outperforming its regional peers with the ISE 100 index climbing 25% so far this year.

However, rating agencies are still hesitant to upgrade Turkey to investment-grade status, with Standard & Poor's also rating it two notches below at 'BB', while Fitch Ratings has it one notch below at 'BB+'. The only country on the 21-country MSCI Emerging Markets Index that Moody's ranks at the same level as Turkey is Indonesia ('Ba2', positive), while it ranks the following countries in the region higher: Russia ('Baa1', stable outlook), Bulgaria ('Baa3', positive), Romania ('Baa3', stable), Latvia ('Baa3', stable), Hungary ('Baa1', possible downgrade).

Basically, rating agencies continue to see Turkey as unstable and susceptible to sharp swings in its situation; in short, it's a place to make speculative bets rather than see safe returns.

The fine print

The rating agencies have reasons to be cautious on Turkey. Most of the growth is being fueled by investors returning to the Turkish market after pulling out during the global crisis. The banking system is sitting on strong foundations, yet Turkey's growth is largely being financed by other people's money. The current account deficit is expected to exceed $36bn this year, or 5% of GDP, and inflation, which is expected to fall from a high of 10% earlier this year, is still nearly double the country's medium-term target of 5%. "The challenge now is for Turkey to once again register larger primary surpluses and continue to reduce its debt levels in order to further bolster its resilience to external shocks," says Sarah Carlson, Moody's lead sovereign analyst for Turkey.

Furthermore, the Turkish government continues to delay the introduction of a fiscal rule, which sets a goal to reduce the country's debt in relation to the size of the economy by pegging 5% as a target for annual growth and keeping the budget deficit below 1% of the GDP. Tied to this are the parliamentary elections that are due by July 22 next year; some suspect the mildly Islamist AKP government is loath to constrain any pre-election spending plans by putting in place this fiscal rule. Fitch's head of sovereign ratings said in September that it's these political tensions that are preventing Turkey from acquiring coveted investment-grade status. "Turkey is knocking on the door of investment grade. The kind of concern is that there is political tension," he was quoted by newswires as saying.

Still, with nearly 11% growth in the first half of 2010 and a new consistency creeping into its performance, many analysts argue hard for its rating to reflect this; the markets already do, with the country's credit-default swaps, contracts that protect bondholders against the risk of default, already pricing in an upgrade. "In my view, there is absolutely no justification why Turkey should be rated one notch behind Egypt, and it is frankly ludicrous that Turkey is rated behind the EU's weak links, ie. Hungary, Latvia and perhaps even Romania; albeit S&P does rate Turkey on par with Latvia," says Timothy Ash of the Royal Bank of Scotland.

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