An upgrade of Turkey’s sovereign debt rating to investment grade may worsen its current-account deficit unless the central bank intervenes to slow lending and prevent the lira from appreciating, Renaissance Capital said.
“Without policy intervention, a rating upgrade could even be negative for Turkey in the medium term,” Mert Yildiz, an economist, said in an e-mailed report from Moscow today. “In the absence of policy intervention, we would expect, as a first impact, for the Turkish lira to appreciate but foreign borrowing costs to come down significantly. Higher borrowing would lead to higher gross domestic product growth, higher consumption, a higher current-account deficit and higher external debt.”
Turkey’s upgrade to investment grade “soon” is “inevitable,” with Fitch Ratings possibly making the move this year, Yildiz said. Turkey is rated one level below investment grade at both Fitch and Moody’s Investors Service, and two levels below at Standard & Poor’s. The current-account shortfall has narrowed for seven months and inflation slowed to 8.9 percent in June, down from a 3 1/2-year high of 11.1 percent two months earlier.
Turkish equities would probably rally on the news “but then fall one quarter after the rating upgrade,” Yildiz said, based on a study of market reactions after other countries were upgraded. “Our results suggest that it really is not that big of a deal,” he said.
The lira would probably strengthen as portfolio inflows into Turkey increased, while interest rates “could be lowered by a few percentage points over time,” the report said.
Even as cheaper borrowing combined with a stronger currency would worsen Turkey’s external deficit, “if the central bank can contain the likely appreciation in the Turkish lira and curb expected domestic lending growth, then we think a rating upgrade could make Turkey a much more stable economy,” it said.
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