Turkish markets jump as Moody's hints at imminent upgrade

By bne IntelliNews January 23, 2013

bne -

Raising speculation that a second ratings lift to investment grade is imminent, Moody's Investors Service announced on January 22 that it has scheduled a teleconference for next week that will discuss, amongst other topics, Turkey's "[shift] closer to an investment grade sovereign rating".

The statement gave extra impetus to the "euphoria" reported in the market since Fitch handed the country its first investment grade for nearly 20 years with an upgrade in November. The lira rose for the first day in three and bonds climbed, reports Bloomberg. Yields on two-year notes slid four basis points to 5.89%, their lowest since December 18.

Ever since the Fitch move, speculation that Moody's would follow suit has been pushing Turkish markets higher. A second investment grade from the major agencies would open the market to larger institutional investors, which need such a rating from two of the three.

That optimism has persisted in the meantime, even through an announcement from Moody's in late November during an annual review that it would retain its rating of 'Ba1' on the sovereign, one notch below investment grade, for the meantime, stressing that it needs time to see the effects of reform.

While Ankara is generally praised for steering the economy to a "soft landing" from the credit-boom driven 8.5% GDP growth it saw in 2011, the country's large current account deficit of around 7% - although significantly reduced from the 10% or so at the start of 2012, remains a risk, as it exposes Turkey to potential shocks in the shaky Eurozone banking sector, which provides much of the financing to cover it.

"Turkey's resilience to economic, financial, and political vulnerabilities has been strengthened considerably in recent years, but the country's susceptibility to event risk is high due to the size of external imbalances," Moody's reiterated in November. "[G]iven the structural nature of these imbalances it will take time to be fully addressed."

The ratings agency indicated in early January that its view was little changed, especially with the central bank now struggling against hot money flows since the Fitch action. However, market sentiment continues to appear convinced that Moody's will move sooner rather than later. The January 22 announcement of the teleconference call will only extend that confidence.

"I guess the market will begin to assume that investment grade is now imminent," Timothy Ash at Standard Bank wrote in a note. "Long overdue in my view, and will fuel some more buying of Turkey risk."

In contrast, Erste analysts said they doubt a second investment grade is just around the corner. "Shortly after the teleconference announcement, Moody's denied the upgrade reports and said that they are sticking with their previous view on Turkey," they note. "In essence, Moody's tends to organize post-rating change teleconferences, rather than [before]."

Either way, the likelihood of more hot money appeared to push the Central Bank of Turkey to surprise with a rate cut to the interest rate corridor later the same day, despite wide expectation that it would remain on hold to stem a return to rapid growth of credit and domestic demand.

"By lowering the floor of the interest rate 'corridor', the CBT now has more flexibility to lower market interest rates. This reflects the CBT's concerns that the recent surge in capital inflows has put upwards pressure on the lira which, in turn, could derail the process of current account adjustment," analysts at Capital Economics suggested, noting that a concurrent rise in reserve requirements would help reduce the effect of monetary easing by reducing market liquidity.

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