Turkey Gets Investment Grade First Time Since ’94 From Fitch

Turkey Raised to Investment Grade First Time Since 1994 by Fitch
Fitch boosted Turkey’s foreign-currency rating to BBB- from BB+ and its outlook to stable, according to a statement today. Photographer: Kerem Uzel/Bloomberg

Turkey received its first investment-grade ranking since 1994 after Fitch Ratings raised the country by one level, citing an easing in economic risk and lower debt. Stocks and bonds rallied to record levels.

Fitch boosted Turkey’s foreign-currency ranking to BBB-from BB+, with a stable outlook, according to a statement today. Turkish yields extended the biggest drop in emerging markets this year, with the rate on benchmark two-year lira notes touching an all-time low of 6.8 percent. The benchmark ISE National 100 Index reached its highest on record.

The upgrade “reflects a combination of an easing in near-term macro-financial risks as the economy heads for a soft landing,” Fitch Managing Director Ed Parker in London wrote. “The Turkish economy is on track to return to a sustainable growth rate, having narrowed the current account deficit.”

Turkey’s current account gap narrowed for a 10th straight month in October to the least since 2009 as exports to the Middle East and Africa made up for lost sales to Europe and slowing growth cut demand for imported goods. Prime Minister Recep Tayyip Erdogan’s government cut debt to 36.5 percent of gross domestic product this year from 74 percent in 2004.

The lira strengthened 0.6 percent against the dollar to 1.7818 as of 5:03 p.m. in Istanbul. The benchmark stock index last traded 1.8 percent higher at 72,724.19, after climbing as much as 2.7 percent to the highest intraday level since at least 1988. The two-year lira bond yields fell 11 basis points to 6.94 percent.

‘Brave Step’

“Finally Fitch took the brave step, which might be a good example for other rating agencies as well,” Tevfik Aksoy, Morgan Stanley’s chief economist for central & eastern Europe, the Middle East and Africa, said in e-mailed comments from London. ‘The positive impact of the move will be gradual and improve the overall quality of Turkey’s financing.’’

Turkey’s economy is “decelerating toward a soft landing” after expanding by 8.5 percent in 2011 and 9.2 percent in 2010, the International Monetary Fund said in a statement on June 8. The inflation rate retreated to 7.8 percent in October from a three-year high of 11.1 percent in April.

The government cut its budget deficit to 1.3 percent in 2011 from 11.9 percent in 2001. Turkey expects the gap to rise to 2.3 percent for this year, above the 1.5 percent it anticipated a year ago. The government forecasts a shortfall of 2.2 percent next year.

Moody’s Investors Service raised Turkey to Ba1 on June 20, one level below investment grade and three below Russia, citing a “significant” improvement in public finances and policies. Greater resilience to external shocks is a prerequisite for raising it to investment grade, Moody’s said in an e-mailed statement on Oct. 30.


Standard & Poor’s cut its outlook on Turkey’s debt to stable from positive on May 1, maintaining its BB rating, two steps below investment grade. Erdogan said at a conference in Istanbul two days later that the “strange” and “ideological” decision didn’t reflect economic reality.

S&P ranked Turkey investment grade until 1994.

A year ago, Fitch cut Turkey’s long-term foreign-currency rating outlook to stable from positive because of the country’s current-account deficit at 10 percent of GDP, the second-highest in the world after the U.S. Investor concern caused the lira to depreciate 18 percent in 2011, the biggest currency slump among emerging markets worldwide.

Central bank governor Erdem Basci responded by introducing a flexible interest-rates policy in October 2011. He varied the lenders’ borrowing costs daily within a corridor bound by 5.75 percent at the lower end and 12.5 percent at the upper to stem the lira’s free-fall and narrow the current-account gap by reining in credit growth.


Economic growth in Turkey slowed to 2.9 percent in the second quarter from 9.1 percent a year earlier. That’s below the average annual growth rate of 5.5 percent since 2002, when Erdogan’s Justice and Development Party took power. To combat slowing growth, Basci cut the top-end of his rates band in September and October, bringing it down to 9.5 percent.

“Turkey has shown that it can navigate with the challenges it had -- both inflation and the current account,” Aurelija Augulyte, a strategist at Nordea Bank in Copenhagen, said in e-mailed comments. “The unconventional monetary policy worked out well, even though the markets were skeptical at the beginning.”

Iran Exports

Turkey’s gold exports to Iran helped narrow the trade deficit to $6.8 billion in September from a record $10.5 billion a year earlier, the statistics office said on its website Oct. 31. Imports fell 6.4 percent to $19.8 billion and exports rose 21 percent to $13 billion led by precious metal exports in September. The trade gap is the largest component of the nation’s current-account gap.

The cost to insure Turkey’s bonds against non-payment using credit-default swaps dropped two basis points to 161, data compiled by Bloomberg show. That compares with 157 basis points for Russia, which is rated a level higher at BBB by Fitch, according to data compiled by Bloomberg.

The extra yield on Turkey’s dollar bonds over U.S. Treasuries has slid to 205 basis points, less than the 315 basis-point spread for investment-grade Croatia, 320 for Romania and 237 for Kazakhstan, JPMorgan Chase & Co. indexes show.

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