Turkish index hits record as Moody's pushes upgrade hopes

By bne IntelliNews October 31, 2012

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On October 30, Moody's Investors Service became the second of the ratings agencies this month to suggest it could soon upgrade Turkey to investment grade, sending the Istanbul Stock Exchange to an historic high.

Following a similar suggestion from Fitch Ratings, Moody's said in a report that it may consider upgrading Turkey if the government continues to marshal what Ankara has called the country's "soft landing," thus reducing its exposure to Europe's shaky debt markets.

A slowdown in domestic demand has helped cool GDP growth from 2011's 8.5% to around 3.0% this year. That has helped to reduce a current account deficit that was in double figures, although Moody's forecasts that it will "remain relatively high at 7.8% and 7.4%... in 2012 and 2013 respectively."

Moody's said it could consider its rating on the sovereign if that trend continues, and the government also increases foreign exchange reserves and reduces private sector external borrowing. Ankara has complained bitterly that its ratings - which lock out many institutional investors due to being below investment grade - are unfair.

However, issued just a day after riot police broke up a secularist rally on the Republic Day holiday, Moody's report also warned that continued political friction between secular and religious elements remains a credit challenge. "Turkey's resilience to economic, financial and political vulnerabilities has strengthened considerably in recent years... Nonetheless, there are some noteworthy areas of political risk in Turkey, some of which stem from secular-religious tensions, others from longstanding regional and ethnic conflicts," the ratings agency said.

Moody's upgraded Turkey in June to 'Ba1', one notch below investment grade, with a positive outlook, citing improvement in public finances. The rating agency warned that the outlook could be revised to stable should the government allow progress on managing external risks to reverse or public finances deteriorate. Some government officials have been pushing the Central Bank of Turkey to ease monetary policy in order to stimulate the slowing economy. However, with the support of other ministers as an internal government debate continues, Governor Basci has remained cautious.

Despite the reservations, Moody's move to join Fitch in holding out the hope of a near-term upgrade saw the Turkish stock market surge on its first day back in business since it closed for holidays on October 25. Capping a two-week rally, the Istanbul Stock Exchange National 100 index rose 1.5% to hit an historic high of 71,717, surpassing the previous record set on November 9, 2010, reports Hurriyet Daily News. By early afternoon trade on October 31, the index had extended its gain another 1% to 72,460.

The rally was originally sparked by Fitch's announcement in early October that it would hold a conference on Turkey's credit outlook on November 8, and comments that it could move the country one notch higher to investment grade before the end of the year. As bne reported last week, Fitch's words saw brewer Anadolu Efes' $500m issue beat the sovereign benchmark, and a flood of Turkish corporate debt is expected to follow in its wake.

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