Turkish delight at Moody's upgrade

By bne IntelliNews June 20, 2012

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In what many analysts consider a long-overdue move, Moody's Investors Service raised Turkey's credit rating to just one notch below the coveted investment grade. And with the rating on "positive" watch, such an upgrade could soon be on the cards if the government makes headway in cutting the current account deficit, foreign exchange reserves rise and private sector external borrowing comes down.

Moody's on Wednesday, June 20 raised Turkey's government bond ratings by one notch to 'Ba1' from 'Ba2', and maintained its positive outlook on the country. The rating agency cited a big improvement in Turkey's public finances and the consequent increased ability of the government's balance sheet to absorb any external shocks, the most immediate of which, many believe, could be a break-up of the Eurozone. Turkey's efforts to diversify its exports away from Europe would also help to resist any spillover risks from such an event, while its banking system is solid and well capitalised.

Moody's also noted new policies that are designed to address external imbalances, such as the large current account deficit, which has been described as the Achilles heel in an otherwise booming economy. Turkey's current account hit 10% of GDP in 2011, among the highest in the world, but this is expected to decline to 8% this year.

The rating move follows a hugely successful Eurobond issue from Turkey on June 19, which showed how investors view the country compared to the disaster zone further west. Turkey borrowed $1bn via a tap sale of 30-year dollar-denominated Eurobonds with a yield of 5.75%, as demand from investors reached around $7bn. Contrast that with Spain, which has seen its borrowing costs rise above the 7% mark - a level considered unsustainable level in the long term.

Moody's action has had a ripple effect on other Turkish assets. Newswires reported the lira had strengthened to 1.7932 against the dollar, from 1.7980 before the upgrade announcement, while the yield on Turkey's benchmark bond fell to 8.92%, the lowest level since the end of February. By midmorning, Istanbul's main stock index was up more than 1%.

The move by Moody's now puts Turkey within touching distance of the long-desired investment grade status. Like Moody's, Fitch Ratings puts Turkey at 'Ba1' (positive), though Standard & Poor's rates the country a notch lower at 'BB+' (stable).

Moody's senior analyst Sarah Carlson told Reuters that about 30% of outlooks result in an eventual rating change up or down depending on the direction of the outlook, and to get there over the next "18 months or so" Turkey needs to become more resilient to balance-of-payment shocks, given the already favourable public-finance metrics," while maintaining that fiscal discipline.

Analysts say Turkey's fundamentals already warrant investment grade status. "Turkey's public debt/GDP ratio, which stood at 39.4% in 2011, is remarkably lower than 'Ba1' countries' median of 54.6% and close to 'Baa3' (investment grade) countries' median of 38.5%," point out analysts Is Investment.

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