Bloomberg News

Erdogan Crowning Decade With Fitch Rewards Bonds: Turkey Credit

November 06, 2012

Turkish Prime Minister Recep Tayyip Erdogan

Turkish Prime Minister Recep Tayyip Erdogan. Photographer: Michele Tantussi/Bloomberg

Turkish Prime Minister Recep Tayyip Erdogan crowned his party’s decade in power with an investment- grade rating, underpinning the world’s best bond rally.

Two-year note yields have plunged 16 basis points to a record-low 6.89 percent since Fitch Ratings raised the country’s debt to investment grade yesterday, extending their drop this year to 412 basis points. The bonds have produced a 15 percent total return this year, the best in major markets worldwide, according to data compiled by Bloomberg.

The upgrade put Turkey on a par with India and seven levels above Greece, a euro member at the center of the region’s debt crisis. It came two days after the 10th anniversary of Erdogan’s ascent to power, a period in which his government has reduced inflation to 7.8 percent from above 70 percent, cut public debt in half and weaned the country off International Monetary Fund lifelines. Standard & Poor’s and Moody’s Investors Service still rate the nation at junk, the same level as Portugal.

“Investment grade is an important step that makes the Turkish asset class more attractive to a range of portfolio investors, notably pension funds,” Nicholas Spiro, managing director of Spiro Sovereign Strategy, said by telephone from London yesterday. “This is the trigger that Turkish policymakers were looking for and should contribute to lower borrowing costs.”

‘Diverse Economy’

Fitch raised Turkey to BBB-, its lowest investment-grade level, with a stable outlook, citing easing near-term financial risks, a moderate and declining government debt burden, a sound banking system, favorable growth prospects and “a relatively wealthy and diverse economy.”

That marks a turnaround from 2002, when Erdogan’s Justice and Development Party upended Turkish politics on the back of a banking crisis the previous year. The party won a majority in parliament, while inheriting $45 billion of debt from the IMF. Today that debt is less than $2 billion. Turkey also opened official membership talks with the European Union in 2005.

The upgrade will “broaden Turkey to a new base of investors, who had previously been restricted due to rating considerations,” Esther Law, a strategist at Societe Generale SA in London, said in an e-mailed report to clients yesterday. “This in turn should help Turkey’s financing cost in the future” and supports “our bullish view on Turkey bonds,” she said.

Current Account

A year ago, Fitch cut Turkey’s long-term foreign-currency rating outlook to stable from positive because of the country’s current-account deficit at 10 percent of gross domestic product, the second-highest in the world, after the U.S. The lira weakened 18 percent last year, the biggest currency slump among emerging markets worldwide.

Central bank Governor Erdem Basci responded by introducing a flexible interest-rates policy in October 2011. He varied Turkish bank borrowing costs daily within a corridor bound by 5.75 percent at the lower end and 12.5 percent at the upper to underpin the lira and narrow the current-account gap by reining in credit growth. Basci has responded to slowing growth this year by bringing the band’s top end down to 9.5 percent.

Improved investor support comes as the government is looking to increase borrowing for investment in areas including transport, education and health by 20 percent to 39.2 billion liras and boost spending on state employees by 19 percent to 114 billion liras before regional elections as early as next October, and presidential and parliamentary voting in 2014. The Treasury said Oct. 31 that it will increase domestic borrowing by 47 percent next year to 150.6 billion liras ($84.5 billion).

Yield Outlook

Moody’s said in an Oct. 30 statement that Turkey needed to show greater resilience to balance of payment shocks to achieve an upgrade. That reflects the current view, Jessica Sibado, a spokeswoman for the company, said by e-mail from London yesterday. S&P Turkey representative Zeynep Holmes declined to comment by e-mail from Istanbul.

Standard & Poor’s rates Turkey two levels below investment grade at BB, while Moody’s puts it one level below at Ba1. The nation has the biggest bond market in eastern Europe and the Middle East.

Some funds require at least two investment-grade ratings for a country to become eligible, limiting the effect of the Fitch move as a second upgrade isn’t likely in the next six months, according to Ozgur Altug, chief economist at Istanbul- based brokerage BGC Partners. Still, foreign capital flows into Turkey should continue and “bond markets might continue to be lucrative,” with yields dropping below 6.5 percent, he said yesterday by e-mail.

Lira Gains

The lira rose 0.4 percent to 1.7752 per dollar at 6:30 p.m. in Istanbul today, extending this year’s gains to 6.5 percent. The currency should strengthen further to between 1.73 and 1.75 per dollar, Bugra Bilgi, director of the hedge fund at Turkiye Garanti Bankasi AS (GARAN), the country’s largest bank by market value, said by e-mail yesterday.

The extra yield investors demand to hold Turkey’s dollar- denominated bonds rather than U.S. Treasuries fell 3 basis points, or 0.03 percentage point, to 206, JPMorgan Chase & Co.’s EMBI Global index showed. That compares with 385 at the end of 2011. The average for emerging markets was 287.

Credit-default swaps on Turkey dropped 6 basis points to 153, compared with 151 for Russia and 88 for Poland. Falling prices show improved perceptions of a borrower’s creditworthiness. Contracts pay the buyer face value in exchange for the underlying securities or cash equivalent should a government or company fail to adhere to its debt agreements.

It’s “remarkable that Turkey has been able to improve its perceived creditworthiness at such a difficult and critical time,” Spiro said. “It’s only a matter of time before the other two agencies follow suit.”

To contact the reporter on this story: Benjamin Harvey in Istanbul at

To contact the editor responsible for this story: Gavin Serkin at

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