By Sujata Rao
LONDON May 17 The coveted investment grade
rating has arrived in Turkey and foreign capital may follow -
possibly a lot of it. But here's the multi-million lira
question: What kind of cash will it be?
What Turkey desperately wants is long-term bricks-and-mortar
investment into factories and infrastructure.
What it is more likely to get initially is more interest in
already booming stock and bond markets - and possibly a fresh
battle in its war against currency appreciation.
An investment grade rating, which Moody's gave Turkey on
Thursday, potentially opens Turkey to more conservative funds.
It could lead to inclusion in global debt indices tracked by
trillions of dollars and might cut borrowing costs for the
government and companies.
"This could bring a whole new investor base to Turkey," says
Tim Ash, head of emerging markets research at Standard Bank.
Not surprising then that bond yields tumbled to fresh record
lows, stocks hit new all-time highs. Average yields on Turkish
sovereign dollar bonds fell to around 3.6 percent, trading for
the first time below erstwhile emerging markets darling, Brazil.
But compare this to what an investor would receive on "safe"
bonds from the United States or Germany or the 4 percent or so
that debt-ridden Spain is paying for 10-year euro risk.
An investment grade Turkey might well attract that marginal
"Turkey is a great example of an economy ... where the
debt-to-GDP ratio is shrinking," said Arvind Rajan,
international chief investment officer in the fixed income
division at Pramerica, the asset management arm of Prudential
"With negative real yields showing on most developed market
bonds, investors might as well increase exposure to those types
of emerging market economies where they are still hugely
underweight," Rajan said.
NOT GAME CHANGER
But the promotion to investment grade, while welcome, is not
Turkey already trades as an investment grade market and
despite the latest rally, the move is unlikely to be a
significant trigger for more huge inflows, says Angus Halkett, a
fund manager at Stone Harbor Investment Partners in London.
At last count, Turkey had a record $150 billion in overseas
investment in its stock and bond markets. Two-thirds of
Istanbul's equity free float is in foreign hands and Turkey is
fund managers' biggest net overweight in emerging markets, a
Bank of America/Merrill Lynch poll showed this month.
The proof is also in debt insurance costs that are below
those of investment grade peers, Russia and South Agrica, and in
bond yields that are negative when adjusted for inflation.
"There may be some extra positive impetus, the market is
squeezing a bit out today but in terms of price there is not a
great deal more juice left in Turkish bonds," Halkett says.
Many argue that the last thing Turkey needs is more
portfolio capital, which is quick to take fright if the global -
or local - backdrop changes and which drives up the lira,
forcing tech central bank to cuts rates as it did on Thursday.
Turkish authorities are not oblivious to the risks. A
central bank paper last year warned that currency appreciation,
current account deterioration and higher credit growth usually
ensue in emerging markets after promotion to investment grade.
And Finance Minister Mehmet Simsek acknowledged at a
conference in London a need to manage "implications associated
with investment grade."
"Investment grade can lead to excessive build up of risk and
we may have to look into that ... we can always step in to stop
corporates from borrowing if needed," he said.
What Simsek and his colleagues in government are hoping for
is a bonanza of foreign direct investment (FDI) in a country
which is still bedevilled by poor infrastructure and poverty.
FDI is more desirable than portfolio flows, simply because
it is less volatile but it covers less than a fifth of Turkey's
whopping balance of payments deficit.
Simon Quijano-Evans, head of emerging markets research at
Commerzbank, Turkey, agrees, noting an FDI pickup in Brazil
following its ascent to investment grade in mid-2008.
"Probably the main positive of the Moody's move is that it
will start to help change the view of foreign direct investors,"
he said, noting Turkey currently has the biggest current account
deficit of all big emerging economies, if net FDI is included.
"This is the one priority area for Turkey."