September 20, 2011S&P Upgrades Turkey's Local-Currency Rating
Istanbul, Standard & Poor's on Tuesday upgraded Turkey's local-currency credit rating to investment grade, underlining the economy's relative strength compared to neighbors in the struggling euro zone and sending Turkish assets higher.
The upgrade of Turkey's lira-denominated debt by one-notch to triple-B-minus from double-B-plus, the lowest rung of investment grade territory, was propelled by improvements in the country's financial sector and the deepening of local markets, S&P said in a statement.
The move for the first time put Turkey's local-currency debt rating on a par with that of Romania, Hungary and Croatia—economies by many measures much weaker than Turkey's—and was warmly welcomed by Turkish officials. Ankara has long complained that Turkey was being unfairly treated by ratings agencies given its strong banking sector, fiscal position and economic growth.
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Economy Minister Zafer Caglyan trumpeted the upgrade as an overdue vindication of the government's economic policies and said it would make Turkey "more appealing place for portfolio investment."
However, S&P didn't change Turkey's more important sovereign-debt rating, which assesses the risk of Turkish default on foreign currency debt and remains below investment grade.
Indeed, Tuesday's move by S&P was initially met with confusion. Some news agencies mistakenly reported that Turkey's sovereign rating had been lifted to investment grade. That saw traders pour into Turkish assets, sending Turkish stocks up to 6.5% higher, the sharpest gains since May 2010, before clarifications that only the local currency rating had been raised saw stocks pare gains to finish trading 5% higher.
"It was an awkward feeling, to be honest, to see 'S&P upgrades Turkey to investment grade' … [it] caught me completely off-guard—only to realize a few minutes later, that this is on 'local' currency debt, not on 'foreign' currency debt," said Murat Ucer, an economist with Global Source Partners, an economic research firm.
Economists welcomed the upgrade but some cautioned that ratings agencies would be unlikely to lift Turkey's sovereign ratings to investment grade while the country maintained a mushrooming current account deficit that is forecast to hit up to 10% of gross domestic product this year.
"This sends a strong signal that Turkey is still an improving credit story. … Don't hold your breath though for S&P, Fitch or Moody's to follow through quickly on the long-term foreign-currency front," said Tim Ash, an economist at RBS in London.
The boost to investor confidence in Turkish assets contrasted starkly with S&Ps decision late Monday to downgrade Italy's sovereign debt rating, a move that reflected fears of contagion from troubled economies such as Greece and Portugal could further fuel Europe's debt crisis.
Turkey's economy has changed dramatically in recent years, posting a 10.2% GDP expansion in the first half of 2011 and outstripping China to record the fastest growth of any G-20 economy. But its ratings, which make it more expensive for the government to borrow money, are now out of step, some economists say. Credit-default swap markets appear to agree, currently trading what amounts to insurance to cover Turkish debt at levels that would imply a rating above investment grade, economists say.
Standard & Poor's and Moody's currently give Turkey a sovereign rating two notches below investment grade, while Fitch Inc. rates it one notch below.
The ratings firms have repeatedly stressed that Turkey suffers from weaknesses that include the oversized current-account deficit, as well as a massive unregistered economy that can make it difficult for the government to raise revenues to fund the gap. Those weaknesses make it vulnerable to a hard landing should the global economy hit another bump in the road, causing external financing to dry up, economists say.
Government ministers say those fears are overdone and that a rapidly slowing economy in the second half will bring the current account deficit to more sustainable levels. The central bank on Tuesday held its key interest rate at a record low, suggesting in a statement that it is leaving the door open to further loosening.
Other market players said the widening gap between Turkey's local and foreign currency rating is likely to last long.
"I don't think the gap between local and foreign currency should be at this level for any period of time. I think the current account deficit will come down and we're about to get government action to help with that. Within six to nine months I think we could see an upgrade of sovereign rating to investment grade," said Guldem Atabay, head of Turkey research for Unicredit.
