* S&P cites rebalancing economy in upgrade
* Keeps Turkey one notch below investment grade
* Sees Kurdish peace process as encouraging sign
By Luciana Lopez and Nick Tattersall
NEW YORK/ISTANBUL, March 27 Ratings agency
Standard & Poor's raised Turkey to within a whisker of
investment grade on Wednesday, citing a rebalancing economy and
progress in a Kurdish peace process, but the move failed to
impress the country's finance minister.
The ratings agency lifted Turkey's sovereign credit rating
to BB-plus from BB with a stable outlook, noting that its
external financing requirements had declined thanks to strong
exports and a drop in domestic demand.
"The Turkish economy appears to be slowly rebalancing,
without undermining its relatively strong fiscal performance,"
S&P said in a statement.
S&P has had a rocky relationship with Turkey, which reacted
angrily last year to the rating agency's downward revision of
its outlook to stable from positive. The agency converted its
ratings on Turkey to "unsolicited" in January, meaning it is not
paid by the country to provide cover but does so anyway.
Finance Minister Mehmet Simsek said in a statement the S&P
upgrade was "encouraging" but that Turkey still deserved better.
Fitch upgraded Turkey to investment grade at BBB- in early
November, and the country 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
Moody's said in January Turkey needed to improve its
resilience to external shocks by narrowing its current account
deficit or boosting foreign reserves before it would consider an
investment grade rating.
Analysts said S&P appeared to be catching up with the two
other main ratings agencies with its latest move.
"The joke is that S&P had Turkey on BB in the first place. I
guess (it will be) easier now to move to investment grade over
the next 12-24 months," said Timothy Ash, head of emerging
market research at Standard Bank in London.
"S&P will be kicking and screaming to get Turkey over the
investment grade hurdle, especially if the current account
deficit is widening as we expect. Moody's is probably a more
likely contender to give Turkey the prized second investment
grade status," he said, but doubted that would come this year.
KURDISH PEACE PROCESS
S&P said the upgrade partly reflected Turkey's progress in
trying to end a three-decade war with Kurdish militants in its
southeast, a conflict that has killed 40,000 people and
consigned the region to poverty.
The jailed leader of the Kurdistan Workers Party (PKK),
considered a terrorist group by the United States and European
Union as well as Ankara, ordered his fighters last week to cease
fire and withdraw from Turkish soil in what is shaping up to be
the most serious peace bid yet.
"We expect this to be more lasting than previous efforts: if
so, security-related costs would decline and the regional
economy, as well as cross-border trade flows, would be boosted,"
the ratings agency said.
Turkey is a major trading partner for northern Iraq's
autonomous Kurdistan region, importing crude oil in exchange for
diesel and exporting grains and construction materials like
sandstone and marble, trade which could flourish if peace lasts.
But S&P also noted risks from municipal and presidential
elections in 2014 and parliamentary elections in 2015.
Prime Minister Tayyip Erdogan's government has built its
reputation on strong economic growth over the past decade and is
eager to consolidate that record as the polls approach.
It has criticised the central bank for too cautious a
monetary policy stance, raising concern about political
The bank has been trying to reinvigorate domestic demand
while preventing loan growth from accelerating so quickly that
it stokes inflation and widens the current account deficit.
"Historically, economic policies have tended to prioritize
growth, with less focus on its composition," S&P said.