* Turkish deputy PM says upgrade overdue
* Financial markets rally
* Finance minister says move will boost growth
* Turkey needs another agency to follow suit
By Daren Butler
ISTANBUL, Nov 5 Turkey regained its investment
grade credit rating on Monday after an 18 year gap, endorsing an
economic transformation achieved in the past decade under Prime
Minister Tayyip Erdogan.
Fitch Ratings upgraded Turkey in a move long coveted by
Ankara, citing underlying strengths and an easing in near-term
risks for the economy, and played down the chances of the
country getting drawn into the civil war in neighbouring Syria.
However, Turkey needs at least one of the two other major
ratings agencies to follow suit for it to join benchmark
investment grade bond indexes, a status that many funds require
before investing in a country.
Fitch highlighted Turkey's moderate and declining government
debt burden, a sound banking system, favourable medium-term
growth prospects and a relatively wealthy and diverse economy.
Turkey's rating was downgraded to junk after an economic
crisis in 1994. However, Erdogan's AK Party government has kept
the economy growing at an average 5 percent annually since it
came to power in 2002. Inflation has also come down to around 8
percent from triple digits in the late 1990s.
Deputy Prime Minister Ali Babacan welcomed the Fitch move,
saying the decision was appropriate and overdue, expressing hope
that other ratings agencies would follow its lead.
"Turkey's achievement of this credit rating is expected to
mark the start of a new era in the access of our public and
private sector institutions to international capital markets,"
Babacan said in a statement.
Fitch upgraded Turkey's long-term foreign currency Issuer
Default Rating (IDR) to 'BBB-' from 'BB+' and the Long-term
local currency IDR to 'BBB' from 'BB+'. The outlooks on the
long-term ratings are stable.
Shares jumped on the news, gaining as much as 2.6 percent to
a record high during the day and closing up 1.84 percent. The
benchmark bond yield fell as low as 6.8 percent, just above its
record low, and the lira strengthened.
There had been growing anticipation of a move by Fitch in
recent weeks but analysts had been expecting an upgrade only in
the outlook rather than the rating itself.
Turkey's economy was Europe's fastest growing in 2011 but
has slowed sharply this year.
"It's important to know that credit markets have been
trading Turkey like an investment grade credit for some time,"
said Manik Narain, emerging markets strategist at UBS. "But at
the end of the day this will create actual investment inflows
and lower borrowing costs even though it was partially priced
However, countries need investment grade ratings from two of
the big three agencies to be included in benchmark investment
grade bond indexes. Moody's rates Turkey one notch below
investment grade, while S&P puts it a rung lower still.
Many economists agreed with Babacan that the Fitch move was
overdue. "Turkey should have long been investment grade status,
given its proven willingness to pay in difficult circumstances.
The external financing risks to the sovereign have long been
overstated," said Standard Bank head of EM research Timothy Ash.
"This is a big confidence boost to Turkey, and should help
attract a new investor base to Turkey. I would expect Moody's to
follow, and eventually S+P - kicking and screaming!" he added.
Moody's, which upgraded Turkey to Ba1 in June, said last
week a history of political friction between secular and
religious elements of Turkish society remained a credit
challenge for the country.
But it said it could consider upgrading Turkey if the
government made further progress in reducing its current account
deficit, increasing foreign exchange reserves or reducing
private sector foreign borrowing.
"Both of the other rating agencies could potentially deliver
one notch upgrades with the next 12 months," said JP Morgan
Chase economist Yarkin Cebeci.
Fitch predicted a soft economic landing. "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," it said.
Turkey's external finances remain a weakness, it said,
pointing to a current account deficit seen at 7.3 percent of GDP
in 2012, albeit down from 10 percent last year.
The economy was expected to remain more volatile than
investment grade peers and an external financing shock and
recession were likely at some point but its creditworthiness has
become more resilient to shocks, Fitch added.
UPGRADE SEEN AS OVERDUE
Finance Minister Mehmet Simsek said the upgrade would
positively affect risk perception, and boost capital inflows and
the country's performance. The economy grew 8.5 percent last
year but growth is expected to slow sharply to 3.5 percent this
year as domestic demand weakens, prompting the central bank to
ease monetary policy.
Fitch said that among the main risk factors that could lead
to negative rating action were a balance-of-payments crisis
caused by an external shock or a political shock.
It also highlighted the risk of an escalation in regional
instability. Turkey's forces shelled Syrian positions last month
after fire from over the border killed five of its civilians.
"Fitch does not expect the civil war in Syria to draw Turkey
into a full-scale military conflict. If such an event took place
and had a significant economic and fiscal impact it could lead
to a downgrade," it said.
Turkish sovereign dollar bonds rallied modestly, with
spreads over U.S. Treasuries tightening 5 basis points in
contrast to the broader emerging markets index where spreads