Turkey back to investment grade rating for Fitch

Fitch Ratings has upgraded Turkey to investment grade, from BBB- to BB+, following a reduction of near-term risks for the economy.

The rating agency said the new rating reflects a combination of an easing in near-term macro-financial risks as the economy heads for a soft landing and underlying credit strengths including a moderate and declining government debt burden, a sound banking system, favourable medium-term growth prospects and a relatively wealthy and diverse economy.

“Fitch believes that the Turkish economy is on track to return to a sustainable growth rate, having narrowed the current account deficit and lowered inflation after overheating in 2011. The agency forecasts GDP growth of 3% in 2012, 3.8% in 2013 and 4.5% in 2014,” Fitch said.

The agency also expects the economy to remain more volatile than investment grade peers, but believes sovereign creditworthiness has become more resilient to shocks.

Fitch’s decision is likely to boost the Turkish economy, making it more attractive to foreign investors, but Turkey will not automatically be included in benchmark investment grade bond indexes as Moody’s rates Turkey one notch below investment grade, and S&P puts it a rung lower still.

Although Turkey has not been completely immune to the recent conflicts that have been growing, the country is now considered by many to be a “safe haven” of sorts in an otherwise rather crisis-ridden region, confirmed Vienna-based Raiffeisen Capital Management.

“This has the potential to lower the financing costs for the government, banks and companies once again, in part because much larger groups of international investors will now be able to invest in Turkey. However, many pension funds require investment grade status from at least two rating agencies. S&P and Moody’s are still below that,” said Gregor Holek, fund manager in the Emerging Markets Equities team at the firm.

Since the beginning of the year, stock prices in Istanbul have risen by more than 40% (ISE 30 Index), and stocks are trading within reach of the all-time highs seen in 2010. Over the past 10 years, the equity markets here have therefore delivered much stronger performance than those in the emerging markets overall.

Following its rise, the Turkish equity market is no longer considered cheap, and the long-standing valuation discount compared to other emerging markets has largely disappeared.

“However, the country is still haunted by some of its old problems, such as high current account deficits and its susceptibility to dramatic increases in oil prices. Ultimately, the growth rate is also substantially down compared to previous years,” Holek said.



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