* Upgrade stamps approval on decade of reform
* Move expected to boost investment flows
* Bond yields hit record lows, Turkish lira weakens
* Minister warns of lira appreciation pressure
By Daren Butler
ISTANBUL, May 17 Turkey hailed its second
investment grade rating on Friday, seeing it as a seal of
approval from international markets for a decade of economic
Investors joined in, driving sovereign bond yields to record
Government enthusiasm was tempered, however, by some concern
that the move, coinciding with a visit by Prime Minister Tayyip
Erdogan to Washington, might trigger over-large capital inflows
into the lira currency.
Moody's assigning a Baa3 rating with a stable outlook to
Turkey late on Thursday, making it eligible for inclusion in a
number of investment-grade only bond indices and adding to the
economy's switch from an emerging market to a developed one.
Fitch Ratings lifted Turkey to investment-grade in November,
while Standard & Poor's rates Turkey one notch below.
Since his conservative, pro-market AK Party first came to
power in 2002, Erdogan has transformed a crisis-prone economy
with chronic inflation into Europe's fastest growing country,
tripling per capita income, in stark contrast with neighbouring
euro zone member Greece.
The largely Muslim country's success coincides with economic
disarray in the European Union, which Turkey has long sought to
join despite strong opposition from many in the bloc.
"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," he said.
Turkey's two-year benchmark bond yield hit
an all-time low of 4.61 percent, having already sunk some 20
basis points to 4.81 percent on Thursday after the central bank
cut key interest rates by 50 basis points.
Yields were at more than 6 percent at the start of the year.
"(This) should attract longer term capital inflows into the
economy and support growth. This is a very impressive
achievement in turbulent global conditions," said Manik Narain,
emerging markets strategist at UBS.
Deputy Prime Minister Ali Babacan, who is in charge of the
economy, echoed Caglayan's criticism of the time it has taken
for Turkey to attain its current rating levels.
"This decision is as correct as it is late. Due to the right
steps that we have taken on the economy, our country's
indicators in global markets have for a long time been on a
similar level as those countries with investment-grade credit
ratings," he said in a statement.
The lira was at 1.8360 against the dollar,
having softened to 1.8300 on Thursday after the rate cut.
The main share index, which has surged 18 percent
this year, was up 0.26 percent at 92,182.10 points, having
touched a record intraday high in early trade. It easily
outperformed a 0.3 percent fall in the main global emerging
markets stock index.
The central bank cut rates to stimulate the economy, which
has been faltering a bit, and to keep the lira from appreciating
due to monetary easing by other central banks.
"The central bank may be prepared to ease policy even more
freely if capital inflows pick up due to this move. We think
they will be keen to protect the exchange rate from appreciation
given rising current account vulnerabilities," UBS' Narain said.
Moody's said its one-notch upgrade was based on structural
improvements in the economy and in public finances that will
better insulate Turkey from external shocks.
Moody's said it expected Turkey's debt burden to decline in
the coming years after falling 10 percentage points to a
"manageable" 36 percent of GDP since the beginning of 2009.
It said Turkey's ability to finance its debt is supported by
a relatively low and decreasing share of debt denominated in
foreign currencies. It estimates foreign debt stock dropped to
27.4 percent at the end of 2012 from 46.3 percent in 2003.
Reforms that Moody's highlighted as giving Turkey a better
footing for handling external shocks include new incentives to
increase investment in personal pensions, boosting energy
efficiency in a move to wean itself off of energy imports.
Hydrocarbon imports are a major contributor to the current