Category: Business

Turkey’s credit rating was raised to a level below investment grade by Moody’s Investors Service, which cited “significant” improvement in public finances and policies to cut the current-account deficit. Lira bonds rallied.

Turkey’s debt was upgraded one step to Ba1, according to an e-mailed statement. Moody’s kept its positive outlook on expectations “the drivers that led to today’s rating upgrade will continue to improve the country’s fiscal and macroeconomic resilience.”

“An upgrade to an investment-grade rating will probably be dependent on Turkey becoming more resilient to balance-of- payment shocks, given the already favorable public-finance metrics,” Moody’s said.

Prime Minister Recep Tayyip Erdogan’s government cut the budget deficit to 1.3 percent of gross domestic product last year from 3.6 percent in 2010 and state debt to 39 percent from 42 percent, according to Treasury data. Central Bank governor Erdem Basci began setting benchmark borrowing costs daily in October to slow inflation and cut the world’s second highest current-account deficit after the economy grew 8.5 percent last year.

Turkey’s inflation rate slowed to a seven-month low of 8.3 percent in May while the current account gap narrowed for six straight months from the previous year to $5 billion in April. The government targets a budget deficit of 1.5 percent and state debt ratio of 37 percent of GDP this year.

Debt Outlook

Fitch Ratings ranks Turkey at BB+, one step below investment grade with a stable outlook. Standard & Poor’s cut the outlook on Turkey’s debt to stable from positive on May 1, maintaining its BB rating, two steps below investment grade.

“Moody’s foreign-currency issuer rating for Turkey is now the best out of the three agencies given the positive outlook,” Societe Generale SA (GLE) said in an e-mailed report by strategists Esther Law and Benoit Anne in London. “We expect the resilience of long-end local debt to continue, boosted by the upgrade.”

Yields on benchmark two-year lira bonds fell 8 basis points to 9.01 percent at 5:54 p.m. in Istanbul, the lowest level since February. The lira climbed 0.4 percent to 1.7941 against the dollar, gaining for a seventh day to the highest level since May 11. The main ISE National 100 (XU100) stocks index rose 0.2 percent to 59,401.26, the highest level since April 30.

Turkey’s general government debt level of 39.4 percent in 2011 was much lower than the Ba1 median of 54.6 percent and more in line with the Baa3 median of 38.5 percent, according to Moody’s.

‘Root Cause’

Government incentives to boost investment and private pensions seek to address “the root causes of the country’s external vulnerabilities, such as the high import content of its exports, the low savings rate and its modest level of foreign- exchange reserves,” Moody’s said. The policies will also increase foreign direct investment inflows, it said.

The country’s diversification of exports is “an important strength” which will help to buffer the economy should market stress from the euro region intensify further, Moody’s said.

Moody’s would consider upgrading Turkey if the government made further progress in lowering its external vulnerabilities by reducing its current account deficit, increasing foreign- exchange reserves, or cutting the private sector’s external borrowing, it said.

The positive outlook on Turkey’s rating “would likely be moved to stable” if progress on addressing external vulnerabilities were to be reversed, according to the report. Any material deterioration in public finances would prompt a downward movement in the outlook, Moody’s said.

“Although not likely given the country’s improved resilience, Moody’s believes that a sudden and sustained stop in foreign capital flows would exert downward pressure on the ratings,” the rating company said in its report.

via Turkey Upgraded to Level Below Investment Grade by Moody’s – Businessweek.

AN WONG

ISTANBUL—Turkish assets leapt higher Wednesday as Moody’s Investors Service announced a long-awaited upgrade to Turkey’s sovereign debt rating, citing the country’s improving public finances and steps taken by Ankara to address its external imbalances.

Moody’s said the move, which raised Turkey’s sovereign-debt rating by one notch to Ba1—just below investment grade—was driven by the fast-growing economy’s improvements in its public finances and the shock-absorption capacity of the government’s balance sheet.

Turkey’s government effectively shrugged at the news, with Economy Minister Zafer Caglayan stressing that the upgrade was “right, but not enough,” adding that Turkey on Tuesday committed to providing $5 billion to the International Monetary Fund.

“We are still today kept on the same level with Hungary, Ireland and Guatemala,” Mr. Caglayan said.

The news saw the Turkish lira surge higher against the dollar to 1.7875 from 1.7980 before slightly trimming those gains. The Turkish benchmark stock index rose 1%, doubling the 0.48% rise in the MSCI emerging markets index, while Turkish bond yields fell to the lowest level since the end of February.

Analysts said the upgrade, which comes as markets have roiled on renewed fears over the prospect of a euro-zone breakup, underlines how stable or strengthening sovereign ratings in emerging Europe are beginning to converge with weakening credit stories in western Europe.

“Although Moody’s is still one notch below investment grade, today’s upgrade to Ba1 is a major positive not only for the credit story but also all Turkish assets,” said Simon Quijano-Evans, head of emerging markets for ING in London. “It also underlines the ratings convergence story that will continue between Western and Eastern Europe, especially given the much better fiscal dynamics of the latter.”

Moody’s, which also kept Turkey’s outlook as positive, signaled that it could upgrade the sovereign rating to investment grade if Turkey continued to reduce its current account deficit and private sector external borrowing while simultaneously increasing foreign exchange reserves.

Still, it is no secret that there is little love lost between Turkey’s policy makers and ratings firms.

Turkish cabinet ministers and central-bank officials have long bemoaned raters’ stance on its fast-growing economy, stressing that Turkey’s credit rating—which all three big firms rank below investment grade—is too low. Ankara has repeatedly fulminated against Fitch Ratings, Moody’s and Standard & Poor’s, hurling accusations of an anti-Turkish bias in their sovereign-ratings analysis. After Fitch lowered Turkey’s outlook in November, Economy Minister Zafer Caglayan said the company couldn’t be independent since it was 60% owned by French investors.

Last month, Turkey’s cabinet reacted furiously to Standard & Poor’s cut in Turkey’s outlook to stable from positive, with Prime Minister Recep Tayyip Erdogan accusing S&P of making an “ideological decision” and threatening to withdraw Turkey’s recognition of the agency as a legitimate credit institution.

Some economists agree. “I think many in the market would have a lot of sympathy for Erdogan and Turkey. The rating agencies have consistently got Turkey wrong, and it is two to three notches mis-rated by any fair assessment,” said Royal Bank of Scotland economist Tim Ash, a known skeptic of ratings companies’ views of Turkey’s credit-worthiness. “It should be investment-grade already.”

Credit-default swap markets also suggest Turkey should have a higher rating; they have traded at levels that would imply a rating above investment grade for months, economists say.

Still, although some market players have argued that Turkish fundamentals warrant a higher credit rating, markets also have been repeatedly unnerved by the rapid expansion of Turkey’s current-account deficit, which stood at 10% of gross domestic product in 2011 and its expected to be around 8% of GDP this year, one of the highest in the world.

via Moody’s Upgrades Turkey – WSJ.com.