Turkey’s upgrade: the $100bn question

For years, in fact since Moody’s Investors Service downgraded Turkey from investment grade 1994, Turkish officials and financiers have been hoping to regain the rating.

On Monday, Fitch gave them their wish, with a BBB- rating. But how much difference does it make? $100bn worth, perhaps?

In a study published last month, Oyak Securities calculated that once Turkey became a true investment grade country, it could hope to attract about $75bn on average in the decade from 2013 – which would mean an extra $100bn over ten years to 2023, since as a non-investment grade country, Turkey should already net about $65bn a year.

The catch is that to qualify as an investment grade country for the purposes of institutional funds, Turkey needs two out of the three big ratings agencies to give it the classification – and here the picture might not be quite so rosy.

Roderick Ngotho at RBS argues that Moody’s is unlikely to follow suit this year or in the next few months. That’s partly because Moody’s, which earlier this year upgraded Turkey to the cusp of investment grade, issued a report last week that emphasised the importance of Turkey structurally reducing its current account deficit and increasing its resilience to balance of payments shocks.

S&P looks even less likely, since their rating for Turkey is the lowest of all three – two notches below investment grade – and they cut the country’s outlook from positive to stable in May, so seemingly closing the door to investment grade for the following 12 months.

That paves the way to a caustic observation by Ngotho and Demetrios Efstathiou, his co-author of an RBS note.

Beyond the short-term euphoria, which should last for a couple of trading sessions, we see little to get excited about the [Fitch] upgrade… Turkey’s assets have long been trading as investment grade, leaving the rating agencies to play catch up with the markets.

Fitch, quite naturally, argues that investment grade is just what Turkey deserves. Ed Parker, Fitch managing director, emphasises the country’s rebalancing away from its previous domestic demand-led growth model.

He is unfazed by arguments that exports this year have been (perhaps unsustainably) boosted by net gold sales of more than $5.5bn, mainly to Iran, arguing that the underlying rebalancing story is still impressive, with the current account deficit coming down to an expected $58bn this year, from $78bn in 2011.

Nor is he worried by the impact on the deficit of revived domestic demand, given that government growth expectations are relatively modest – Ankara predicts 3.2 per cent growth this year, 4 per cent in 2013 and 5 per cent for the next two years after that.

“Turkey still can have domestic demand growth without the current account deficit increasing,” he says.

Still, concern has already been sounded from one quarter. A note on upgrades throughout the world from 1990 to 2011 remarks on a number of phenomena that Turkey might want to prepare for, just in case. Here’s an extract:

While cost of external debt falls significantly following the upgrade, the average maturity of debt does not portray a significant change… Domestic currency appreciates significantly… both before and after the upgrade. Total external debt, which formerly declines mostly due to reduction in public debt, displays an upward trend in the post-upgrade period. Meanwhile, current account deteriorates in most of the cases… Finally, despite higher post-upgrade absolute growth rates, relative growth performances in pre- and post-upgrade periods do not differ statistically significantly.

The source of this bucket of cold water? The Turkish central bank.

Related reading:
Fitch raises Turkey to investment grade
, FT