What Turkey needs to do to become investment grade
Turkey should narrow its current account deficit in order to be upgraded to investment grade, Moody’s agency said
A prerequisite for the country to get investment-grade status is greater resilience to balance-of-payment shocks, such as a sharp decline in capital inflows into Turkey from foreign-bank lenders and/or institutional investors, Sarah Carlson, sovereign credit officer at Moodys, said in a statement.
Some emerging markets analysts have argued that Turkey deserves to be upgraded to investment grade because of its robust economic growth and low public debt.
Moodys rates Turkey just a notch below investment grade, at Ba1. Rival agencies Fitch and S&P also rate it below investment grade, at BB+ and BB respectively.
Moodys would consider upgrading the countrys rating to investment grade if the government cut the structurally high current account deficit, increased foreign exchange reserves or cut the private sectors external borrowing, Carlson said.
On the other hand, the current positive outlook would likely be changed to stable if progress on addressing external vulnerabilities were to be reversed, she said.
A sudden and sustained stop in foreign capital flows would also put pressure on the ratings, the Moodys credit officer said, although admitting it was not likely given the countrys improved resilience.
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Carlson forecast that the pace of the current account reduction which is estimated to narrow to below 8% this year from last years 10% - will slow and the gap will remain relatively high at around 7.4% next year.
The rating agency noted the series of structural reforms that the government has recently launched and which are meant to address the root causes of these vulnerabilities, such as the high import content of its exports, the low savings rate and the countrys modest level of foreign exchange reserves.Turkeys economic growth is likely to slow significantly this year, to 3% from last years 8.5%, Carlson said, adding that there were some noteworthy areas of political risk in Turkey, some of which stem from secular-religious tensions, others from longstanding regional and ethnic conflicts.