Turkey’s Local-Currency Debt Rated Investment Grade by S&P; Stocks Rally
Turkey’s local-currency credit rating was raised to investment-grade by Standard & Poors, which cited “continuing improvements” in the country’s financial industry and the expansion of local debt markets.
S&P increased Turkey’s local-currency rating one step to BBB-, the lowest investment-grade ranking, and affirmed the foreign-currency sovereign rating at BB, two levels below investment grade, with a positive outlook, according to an e- mailed statement today. Turkish shares rallied the most in more than a year and the lira rebounded from a 2 1/2-year low.
The upgrade reflects deeper local currency markets and “the increased ability of the government to fund itself in local currency at longer maturities,” Frank Gill, the London- based analyst at S&P who wrote the report, said in a telephone interview. “That the government is funding itself three- quarters in local currency that’s a strength.”
Banks have led Turkish stocks to the biggest gains worldwide in the past month, with the ISE National 100 Index (XU100) rallying 15 percent, as investors grow convinced that interest rate cuts will stimulate growth without causing the economy to overheat. The equity market, which lagged behind peers in the first seven months this year, climbed after policy makers lowered borrowing costs on Aug. 4 for the third time since December, prompting brokerages such as Goldman Sachs Group Inc. and UBS AG to raise some estimates and recommendations on banks.
The ISE 100 jumped 5.1 percent at the 5:30 p.m. close of trading in Istanbul. The lira strengthened 1 percent against the dollar. Yields on lira-denominated two-year bonds fell 24 basis points to 8.03 percent, after plunging as much as 41 basis points to 7.86 percent, in the biggest drop since May 2010, according to the RBS Istanbul Benchmark Bond Index.
S&P’s upgrade may allow the Treasury to “issue long term lira-denominated eurobonds,” Ozgur Altug, chief economist at BGC Partners in Istanbul, wrote in an e-mailed comment. Turkish companies would also have access to lira borrowing on international capital markets, he said.
The average maturity of local-currency debt has increased to 34 months in 2011 from 24 months in 2008, S&P said in its report today’s. Government debt is 72 percent denominated in liras, according to August figures from the Treasury.
“You have a discrepancy in Turkey between a very strong fiscal position in terms of public debt dynamics and deepening local markets but also a quite vulnerable, large external imbalance,” Christian Keller, an economist at Barclays Capital in London, said by telephone. “That asks for a difference between what you think local debt is rated, and what foreign currency debt is rated. Turkey is a country where the difference probably should be large.”
The country’s “weakest element” is its current-account deficit, S&P said. The 12-month current-account gap reached a record $74.6 billion in July, about 10 percent of gross domestic product.
The deficit is likely to narrow as economic growth slows to between 2 and 3 percent next year from about 6 percent this year, S&P’s Gill said. “What we’re going to do now is observe the adjustment, see how that’s going to affect the government’s position.”
Moody’s Investors Service said Aug. 3 that failure to address the external imbalances could jeopardize the country’s move toward investment grade. Moody’s ranks the government’s local-currency debt two grades below investment status, while Fitch Ratings places it one step below.
The rating company “cannot move Turkey’s foreign currency long-term rating to investment grade while the country is still running a wide current-account deficit,” Tim Ash, chief emerging-markets economist at Royal Bank of Scotland Group Plc in London, said in an e-mailed response to questions. “Don’t hold your breath though for S&P, Fitch or Moody’s to follow through quickly on the foreign-currency front.”
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