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Turkish Rating Outlook Raised to Positive by Moody’s

Moody’s Investors Service raised the outlook on Turkey’s Ba2 local and foreign currency bond ratings to positive from stable citing a resilient economy and improving debt management.

“Turkey’s economy has proven to be unexpectedly robust and has recovered to pre-crisis levels,” said New York-based Moody’s analyst Sarah Carlson in an e-mailed report today. The country’s budget deficit and debt levels have improved beyond targets in the government’s medium-term economic program, she said.

Deputy Prime Minister Ali Babacan and Central Bank Governor Durmus Yilmaz both argue that credit default swaps and other indicators show that the country’s debt rating should be raised by S&P, Moody’s and Fitch Ratings Ltd. Moody’s upgraded Turkey to Ba2 in January, two levels below investment grade and S&P increased its ranking in February to BB. Fitch raised its rating to BB+ in December, or one step below investment grade.

The benchmark ISE National 100 index in Istanbul climbed as much as 1.1 percent to 66,117.29 after Moody’s made the statement, nearing a record high. It was up 0.5 percent at 10:45 a.m. Two-year lira bonds gained, with yields falling 5 basis points to 7.98 percent. The lira reversed earlier losses, rising 0.1 percent to 1.4531 per dollar.

Investment Grade

“We expect Moody’s and S&P to upgrade Turkey post- elections, so in a yearlong window we expect them to catch up,” said Turker Hamzaoglu, a London-based economist at Bank of America Corp.-Merrill Lynch & Co., said in a telephone interview. “For Turkey to become investment grade there are three main issues: inflation, whether the current account is under control, and how the government handles fiscal policy without a fiscal rule or the IMF.”

Prime Minister Recep Tayyip Erdogan said yesterday he expects parliamentary elections to be held in the first week of June next year. He’s campaigning for re-election after the economy grew an annual 10.3 percent in the second quarter, which matched China’s as the fastest expansion in the period among the Group of 20 major economies.

Moody’s revised its forecasts for economic growth in Turkey this year to 6.5 percent and to 5 percent in 2011, Carlson said.

The more rapid expansion has helped the budget exceed goals drawn up in October 2009 when the government expected 3.5 percent growth. The budget gap in the first eight months of the year was 14.4 billion liras ($9.6 billion), compared with a full-year target of 50.2 billion liras, the Finance Ministry said on Sept. 15.

Domestic Demand

The current-account deficit is also widening as domestic demand draws in imported raw material and goods. The gap expanded to $30.3 billion in the 12 months through July, or about 5 percent of 2009 gross domestic product.

“If the government maintains fiscal discipline, it is easy to see Turkey being rated investment grade soon after elections,” Tevfik Aksoy, Morgan Stanley’s London-based chief economist for Turkey, the Middle East and north Africa, said in an e-mailed comment today.

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