Turkey Gets Investment Grade First Time Since ’94 From Fitch

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 government debt. Bond yields sank to a record low.

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 marketsthis year, with the rate on benchmark two-year lira notes falling 19 basis points, the most since January, to the lowest in at least seven years at 6.86 percent.

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 in the report. “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 to the least since 2009 in October as exports to the Middle East and Africa made up for lost sales to Europe. Prime Minister Recep Tayyip Erdogan’s government cut debt to 39 percent of gross domestic product last year from 74 percent in 2004.

The lira strengthened 0.6 percent against the dollar to 1.7824 as of 1:39 p.m. in Istanbul. Stocks were 0.6 percent to 71,812.90 before the midday break in Istanbul.

‘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.

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.

Deficit

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 responded that the “strange” 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 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. The lira slumped 18 percent in 2011 in the biggest depreciation worldwide due to the burgeoning gap.

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. He has since cut the top-end of the band, bringing it down to 9.5 percent to stimulate demand.

Unconventional

“Turkey has shown that it can navigate with the challenges they had -- both inflation and 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.”

The cost to insure Turkey’s bonds against non-payment using credit-default swaps was little changed today at 163 basis points, data compiled by Bloomberg show. That compares with 156 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 210 basis points, less than the spread of 301 for investment-grade Croatia, 303 for Romania and 229 for Kazakhstan, JPMorgan Chase & Co. indexes show.

reporter on this story: Selcuk Gokoluk in Istanbul