Bloomberg News

Turkey Local Debt Rating Raised to Investment Grade by S&P

September 20, 2011

(Updates with bonds, comments from fifth paragraph.)

Sept. 20 (Bloomberg) -- Turkey’s local-currency credit rating was raised to investment-grade by Standard & Poors, which cited “continuing improvements” in the country’s financial industry and the expansion of local debt markets.

S&P increased Turkey’s local-currency rating one step to BBB-, the lowest investment-grade ranking, and affirmed the foreign-currency sovereign rating at BB, two levels below investment grade, with a positive outlook, according to an e- mailed statement today. Turkish shares rallied the most in more than a year and the lira rebounded from a 2 1/2-year low.

“The local-currency upgrade reflects our view of continuing improvements in Turkey’s financial sector and the deepening of local markets,” Frank Gill and Leila Butt, London- based analysts at S&P, wrote in a statement today. “The Turkish banking system is adequately capitalized and we expect the state will reduce its holding of some public-sector commercial banks.”

Banks have led Turkish stocks to the biggest gains worldwide in the past month, with the ISE National 100 Index rallying 14 percent in the past month, as investors grow convinced that interest rate cuts will stimulate growth without causing the economy to overheat. The equity market, which lagged behind peers in the first seven months this year, climbed after policy makers lowered borrowing costs on Aug. 4 for the third time since December, prompting brokerages including Goldman Sachs Group Inc. and UBS AG to raise price estimates.

Stocks, Lira

The ISE 100 jumped 4.5 percent at 4:14 p.m. in Istanbul. The lira strengthened 1.3 percent against the dollar. Yields on lira-denominated two-year bonds fell 28 basis points to 7.99 percent, after plunging as much as 41 basis points to 7.86 percent, in the biggest drop since May 2010, according to the RBS Istanbul Benchmark Bond Index.

S&P’s upgrade may allow the Treasury to “issue long term lira-denominated eurobonds,” Ozgur Altug, chief economist at BGC Partners in Istanbul, wrote in an e-mailed comment. Turkish companies would also have access to lira borrowing on international capital markets, he said.

The average maturity of local-currency debt has increased to 34 months in 2011 from 24 months in 2008, S&P said. Government debt is 72 percent denominated in liras, according to August figures from the Treasury.

Weakest Element

The country’s “weakest element” is its current-account deficit, S&P said. The 12-month current-account gap reached a record $74.6 billion in July, about 10 percent of gross domestic product.

“We could raise the ratings on Turkey if, once the economy cools as we expect, it can reduce its current-account deficits,” S&P said. “This heavy reliance on external savings exposes Turkey to shocks.”

Moody’s Investor Service Ltd. said Aug. 3 that failure to address the external imbalances could jeopardize the country’s move toward investment grade. Moody’s ranks the country’s local- currency debt two grades below investment status, while Fitch Ratings places it one step below.

The rating company “cannot move Turkey’s foreign currency long-term rating to investment grade while the country is still running a wide current-account deficit,” Tim Ash, chief emerging-markets economist at Royal Bank of Scotland Group Plc in London, said in an e-mailed response to questions. “Don’t hold your breath though for S&P, Fitch or Moody’s to follow through quickly on the foreign currency front.”

--With assistance from Benjamin Harvey in Istanbul. Editors: Stephen Kirkland, Linda Shen

To contact the reporter on this story: Steve Bryant in Ankara at

To contact the editor responsible for this story: Andrew J. Barden at t

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