May 16, 2013 / 7:57 PM / in 5 years

UPDATE 2-Moody's lifts Turkey's credit rating to investment grade

By Daniel Bases

NEW YORK, May 16 (Reuters) - Turkey earned its second investment-grade credit rating on Thursday with an upgrade to Baa3 by Moody’s Investors Service, a factor that now allows more investors to put money to work in an economy whose rapid growth has recently tapered.

Moody’s said the decision to lift the rating one notch and put a stable outlook on the credit was based upon structural improvements in the economy as well as its public finances that will better insulate it from external shocks.

“Since the beginning of 2009, Turkey’s debt burden has fallen by 10 percentage points to a manageable 36 percent of GDP, and Moody’s expects this decline to continue in the coming years,” the statement said.

Moody’s decision brings it in line with Fitch Ratings, which put Turkey at investment grade BBB-minus with a stable outlook in November. Standard & Poor’s rates Turkey one notch below investment grade at BB-plus with a stable outlook.

“I think something to bear in mind with Turkey is that while the economic and public finance metrics are generally stronger than those of Baa3-rated peers, balancing it out are the external vulnerabilities that are generally greater than those of other Baa3 issuers,” Sarah Carlson, a senior credit officer with Moody’s in London, said in a telephone interview.

“And those external vulnerabilities do take time to address through the kind of structural measures that the government has taken,” she added.

Earlier on Thursday, Turkey’s central bank cut its benchmark interest rates by 50 basis points in a bid to stimulate an economy that has experienced rapid growth but faltered in the past year. The cut was also aimed at keeping the lira from appreciating due to aggressive monetary easing by other central banks.

“Unbelievable ... Moody’s were talking it down last week. This is long deserved, albeit probably priced in now by the market,” said Tim Ash, head of emerging markets research at Standard Bank in London.

In the aftermath of the interest rate cuts Turkey’s benchmark two-year bond sank to a record low of 4.81 percent from 5.02 percent in earlier trade. The lira weakened to 1.8300 against the U.S. dollar from 1.8228 before the announcement. The lira has since strengthened back to 1.8235 in thin New York trade.

The bank cut the one-week repo policy rate to 4.5 percent from 5.0 percent. It cut the borrowing rate to 3.5 from 4.0 percent and the lending rate to 6.5 from 7.0 percent.

Immediately following the upgrade, Turkish Deputy Prime Minister Ali Babacan, issued a statement in Turkish saying the upgrade brings market indicators and credit rating more in line.

“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,” Babacan said in a statement translated by Reuters.

Moody’s highlighted Turkey’s ability to finance its debt is supported by its relatively low and decreasing share of debt denominated in foreign currencies. It estimates the foreign debt stock has 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 account deficit.

Additionally, the adoption of a new commercial code in 2012 “will improve corporate governance standards and overall competitiveness,” Moody’s said.

Finance Minister Mehmet Simsek, in an email to Reuters said: “This rating will increase access to international financing for our Treasury and our companies, reduce the burden of borrowing and will positively contribute to our country’s long-term growth.”

Turkey, a nation of roughly 75 million people who are nearly all Muslim, has been a candidate for membership in the predominantly Christian European Union since 1999. Membership talks formally opened in 2005, but have largely stalled since the financial crisis.

Moody’s upgrade of Turkey happened while Turkish Prime Minister Tayyip Erdogan, who leads the Islamist-rooted AK Party, is visiting the United States for talks with U.S. President Barack Obama.

The two NATO allies sought to project a united front over the civil war in Syria that has led to a recent spillover of violence into Turkey.

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