* 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, which Moody's rates 11 notches lower.
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, extending Thursday's falls
after the central bank cut key interest rates by 50 basis points
The yield rebounded to 4.74 percent in afternoon trade, but
they 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 1.8387 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 0.2 percent at 92,132.97 points, having
touched a record intraday high in early trade. It outperformed
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.
Addressing upgrade-related risks, Finance Minister Mehmet
Simsek said in London there was concern about corporate
liabilities, given Turkey's large current account deficit.
"An investment grade can lead to an excessive build up of
risks and we may have to look into that. We can always step in
to stop corporates borrowing," Simsek said, while welcoming the
prospect of a bigger investment pool and more favourable rates.
Moody's said Thursday's one-notch upgrade was based on
structural improvements in the economy and in public finances
that will better insulate Turkey from external shocks. 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.
Turkey's ability to finance debt is helped by a relatively
low and decreasing share of debt denominated in foreign
currencies, it said, estimating foreign debt stock dropped to
27.4 percent at the end of 2012 from 46.3 percent in 2003.