For years, Turkey was looked at as that economy that could only be vindicated with full induction into the European Union. But it’s done quite well without that ribbon, thanks. Its stock market is surging and government borrowing costs are plunging. Foreign direct investors want in. Turkey can and does strut at international events.
The nation’s economy got a vital boost May 16 when Moody’s lifted its government bond ratings to investment grade; Fitch had already done so in November. (Another big rating firm, Standard & Poor’s, has the debt a notch below investment grade.) Moody’s cited “recent and expected future improvements in key economic and public finance metrics.” Yields on Turkey’s two-year benchmark lira bonds fell to an all-time low of 4.61 percent; they are down 1.38 percentage points just this year. Ten-year debt yields fell below 6 percent for the first time and the Borsa Istanbul 100 equity index rallied to another all-time high.
The strategically vital bridge between Europe and the Middle East is coming off more than a decade of economic improvements that span pension reform, privatizations, and curtailed inflation. Per capita income has soared. Moody’s anticipates that Turkey’s debt burden will keep declining after falling 10 percentage points to a “manageable” 36 percent of gross domestic product since 2009. Its share of debt denominated in foreign currencies is at 27 percent now, compared with 46 percent a decade ago. According to Bloomberg data on credit-default swaps, Turkey’s risk premium is now on par with Brazil and Israel and lower than South Africa, Russia, or Hungary.
“Turkey long deserved this rating, or an even higher one, both economically and politically. I see this as a delayed recognition of what we deserved,” Economy Minister Zafer Caglayan said in a statement. “We now expect much greater investments, both in terms of direct and portfolio investments. The central bank needs to be ready for the pressures this will exert on the lira.”
It’s a high-class problem to have: global bond and equity investors drawn to your investment-grade debt and piling into your securities and currency. Turkey will inevitably draw more mainstream emerging-market investors, who may have previously grouped it alongside less-developed frontier economies. What if the lira gets too hot for comfort?
On May 16, the central bank in Ankara lowered its benchmark repo rate by 0.5 percentage point to 4.5 percent, and it reduced the top and bottom ends of its so-called interest-rate corridor by the same amount. Those cuts were twice as large as estimated in Bloomberg surveys; the central bank’s index for the lira’s value against Turkey’s trading partners rose past the level that it says represents overvaluation.
Elsewhere, the struggling, growth-starved European Union could really use a Turkey.