Tur­key gets in­vest­ment grade first time since 1994 from Fitch

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Tur­key re­ceived its first in­vest­ment­grade rank­ing since 1994 af­ter Fitch Rat­ings raised the coun­try by one level, cit­ing an eas­ing in eco­nomic risk and lower debt. Stocks and bonds ral­lied to record lev­els.

Fitch boosted Tur­key’s for­eign-cur­rency rank­ing to BBB- from BB+, with a sta­ble out­look, ac­cord­ing to a state­ment to­day. Turk­ish yields ex­tended the big­gest drop in emerg­ing mar­kets this year, with the rate on bench­mark two-year lira notes fall­ing 19 ba­sis points, the most since Jan­uary, to an all-time low 6.86 per­cent. The bench­mark ISE Na­tional 100 In­dex (XU100) touched its high­est on record, jump­ing 2.7 per­cent.

Fitch boosted Tur­key’s for­eign-cur­rency rat­ing to BBB- from BB+ and its out­look to sta­ble, ac­cord­ing to a state­ment on Mon­day.

The up­grade “re­flects a com­bi­na­tion of an eas­ing in near- term macro-fi­nan­cial risks as the econ­omy heads for a soft land­ing,” Fitch Manag­ing Di­rec­tor Ed Parker in Lon­don wrote. “The Turk­ish econ­omy is on track to re­turn to a sus­tain­able growth rate, hav­ing nar­rowed the cur­rent ac­count deficit.”

Tur­key’s cur­rent ac­count gap nar­rowed for a 10th straight month in Oc­to­ber to the least since 2009 as ex­ports to the Mid­dle East and Africa made up for lost sales to Europe and slow­ing growth cut de­mand for im­ported goods. Prime Min­is­ter Re­cep Tayyip Er­do­gan’s gov­ern­ment cut debt to 36.5 per­cent of gross do­mes­tic prod­uct this year from 74 per­cent in 2004.

The lira strength­ened 0.6 per­cent against the dol­lar to 1.7828 as of 2:50 p.m. in Is­tan­bul. The bench­mark stock in­dex last traded 2 per­cent higher at 72,866.50, af­ter touch­ing the peak since at least 1988 ear­lier to­day.

“Fi­nally Fitch took the brave step, which might be a good ex­am­ple for other rat­ing agen­cies as well,” Tev­fik Ak­soy, Mor­gan Stan­ley’s chief econ­o­mist for cen­tral & eastern Europe, the Mid­dle East and Africa, said in e-mailed com­ments from Lon­don. ‘The pos­i­tive im­pact of the move will be grad­ual and im­prove the over­all qual­ity of Tur­key’s fi­nanc­ing.’’

Tur­key’s econ­omy is “de­cel­er­at­ing to­ward a soft land­ing” af­ter ex­pand­ing by 8.5 per­cent in 2011 and 9.2 per­cent in 2010, the In­ter­na­tional Mone­tary Fund said in a state­ment on June 8. The in­fla­tion rate re­treated to 7.8 per­cent in Oc­to­ber from a three-year high of 11.1 per­cent in April.

The gov­ern­ment cut its bud­get deficit to 1.3 per­cent in 2011 from 11.9 per­cent in 2001. Tur­key ex­pects its bud­get deficit will rise to 2.3 per­cent for this year, above the 1.5 per­cent it an­tic­i­pated a year ago. The gov­ern­ment fore­casts a gap of 2.2 per­cent next year.

Moody’s In­vestors Ser­vice raised Tur­key to Ba1 on June 20, one level be­low in­vest­ment grade and three be­low Rus­sia, cit­ing a “sig­nif­i­cant” im­prove­ment in pub­lic fi­nances and poli­cies. Greater re­silience to ex­ter­nal shocks is a pre­req­ui­site for rais­ing it to in­vest­ment grade, Moody’s said in an e-mailed state­ment on Oct. 30.

Stan­dard & Poor’s cut its out­look on Tur­key’s debt to sta­ble from pos­i­tive on May 1, main­tain­ing its BB rat­ing, two steps be­low in­vest­ment grade. Er­do­gan said at a con­fer­ence in Is­tan­bul two days later that the “strange” and “ide­o­log­i­cal” de­ci­sion didn’t re­flect eco­nomic re­al­ity.

S&P ranked Tur­key in­vest­ment grade un­til 1994.

A year ago, Fitch cut Tur­key’s longterm for­eign-cur­rency rat­ing out­look to sta­ble from pos­i­tive be­cause of the coun­try’s cur­rent-ac­count deficit at 10 per­cent of GDP, the sec­ond-high­est in the world af­ter the U.S. In­vestor con­cern caused the lira to de­pre­ci­ate 18 per­cent in 2011, the big­gest cur­rency slump among emerg­ing mar­kets world­wide.

Cen­tral bank gover­nor Er­dem Basci re­sponded by in­tro­duc­ing a flex­i­ble in­ter­est-rates pol­icy in Oc­to­ber 2011. He var­ied the lenders’ bor­row­ing costs daily within a cor­ri­dor bound by 5.75 per­cent at the lower end and 12.5 per­cent at the up­per to stem the lira’s free-fall and nar­row the cur­rentac­count gap by rein­ing in credit growth.

Eco­nomic growth in Tur­key slowed to 2.9 per­cent in the sec­ond quar­ter from 9.1 per­cent a year ear­lier. That’s be­low the av­er­age an­nual growth rate of 5.5 per­cent since 2002, when Er­do­gan’s Jus­tice and De­vel­op­ment Party took power. To com­bat slow­ing growth, Basci cut the top-end of his rates band in Septem­ber and Oc­to­ber, bring­ing it down to 9.5 per­cent.

“Tur­key has shown that it can nav­i­gate with the chal­lenges it had — both in­fla­tion and the cur­rent ac­count,” Aure­lija Augu­lyte, a strate­gist at Nordea Bank in Copen­hagen, said in emailed com­ments. “The un­con­ven­tional mone­tary pol­icy worked out well, even though the mar­kets were skep­ti­cal at the be­gin­ning.”

Tur­key’s gold ex­ports to Iran helped nar­row the trade deficit to $6.8 bil­lion in Septem­ber from a record $10.5 bil­lion a year ear­lier, the sta­tis­tics of­fice said on its web­site Oct. 31. Im­ports fell 6.4 per­cent to $19.8 bil­lion and ex­ports rose 21 per­cent to $13 bil­lion led by pre­cious metal ex­ports in Septem­ber. The trade gap is the largest com­po­nent of the na­tion’s cur­rent-ac­count short­fall.

The cost to in­sure Tur­key’s bonds against non-pay­ment us­ing credit-de­fault swaps dropped two ba­sis points to 160, data com­piled by Bloomberg show. That com­pares with 156 ba­sis points for Rus­sia, which is rated a level higher at BBB by Fitch, ac­cord­ing to data com­piled by Bloomberg.

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