Fitch Raises Turkey Outlook

By ART PATNAUDE And CLARE CONNAGHAN

LONDON—Fitch Ratings raised its outlook on Turkey’s double-B plus rating to positive from stable Wednesday, saying a strong economic recovery and improving public finances have increased confidence that a “lasting transformation” in the stability of the country is under way.

The ratings agency said the country is enjoying a “V-shaped” recovery after a severe recession, with domestic demand leading the way, and that public finances are increasing confidence in its sovereign creditworthiness.

“Nevertheless, there is some uncertainty whether Turkey can grow robustly without generating significant imbalances that pose a threat to macroeconomic stability,” Ed Parker, head of emerging Europe in Fitch’s sovereigns team, said in a statement.

Turkey’s economy has rebounded rapidly from a near-5% contraction last year, to expand 11.7% in the first quarter and 10.3% in the second quarter. That ties it with China for the fastest growth in the Group of 20 industrialized and developing nations.

That rapid expansion, however, has also seen Turkey’s current-account deficit widen sharply this year as consumer-fueled growth prompted a surge in imports. Last month, the government raised its forecast for this year’s current-account deficit to $39.3 billion, or 5.4% of gross domestic product, from the $18 billion originally forecast.

Fitch’s expectations are higher, with the rating agency forecasting Turkey’s current-account deficit to hit $44 billion in 2010 and $53 billion in 2011, hindering its external liquidity position and exposing it to abrupt shifts in global liquidity. “Turkey’s external finances are deteriorating,” the rating agency said.

In another worrying sign, the quality of financing the deficit has weakened, Fitch said, noting that a growing proportion comes from short-term and portfolio debt inflows. “These trends are worsening the external liquidity position and expose the country to an abrupt shift in global liquidity,” it added.

Turkey’s central bank is also set to miss its year-end inflation target for the fourth time in five years, the report said. “In this challenging policy environment, with strong ‘hot money’ capital inflows, Fitch believes there is a risk of inflation remaining above target and, at some point, financial volatility occurring.”

Earlier this month, Turkey’s central bank left its benchmark interest rate unchanged for the sixth straight month but dramatically cut its overnight borrowing rate owing to a surprise increase in consumer inflation.

According to the latest official data, monthly consumer prices rose 1.83% in October, taking the annual inflation rate to 8.62%. The central bank had expected CPI to rise 1.15%. After the recent data, annual inflation expectations for 2010 also jumped from 7.6% to 8.1% in the central bank’s survey conducted Nov. 8.

The latest outlook revision comes after a two-notch upgrade to ‘double-B plus’ in December 2009, which recognized an improvement in Turkey’s credit fundamentals and its relative resilience to the global financial crisis.

Peer rating-agency Moody’s Investors Service Inc. currently rates Turkey Ba2 with a positive outlook. Similarly, Standard & Poor’s rates Turkey two notches below investment grade at double-B.

Turkish policy-makers have long complained that the country’s sovereign rating is too low. Most recently, the country’s Finance Minister Mehmet Simsek said he expects rating agencies to upgrade Turkey’s credit rating after parliamentary elections next year.

Fitch said that if Turkey implements fiscal policy consistent with a downtrend in the government’s debt-to-GDP ratio then it would consider upgrading the country. Also, the rating could face upwards pressure if the country comes through elections without a “material increase” in political instability.

via Fitch Raises Turkey Outlook – WSJ.com.