Turkey Upgraded to Level Below Investment Grade by Moody’s

Turkey Upgraded to Ba1 From Ba2 at Moody’s
Construction cranes stand amongst skyscrapers and commercial buildings in the Levent district of Istanbul. Photographer: Kerem Uzel/Bloomberg

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 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 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.

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