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 Moody’s, 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.
Moody’s 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.
Moody’s would consider upgrading the country’s rating to investment grade if the government cut the structurally high current account deficit, increased foreign exchange reserves or cut the private sector’s 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 Moody’s credit officer said, although admitting it was “not likely given the country’s improved resilience.”
Turkey has diversified its exports away from the crisis-hit eurozone and the central bank has taken unorthodox measures such as moving rates within a certain corridor in order to weaken the lira without flaring up inflation, to counteract the spillover from the slowdown in Europe. Carlson forecast that the pace of the current account reduction – which is estimated to narrow to below 8% this year from last year’s 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 country’s modest level of foreign exchange reserves.”
Turkey’s economic growth is likely to slow significantly this year, to 3% from last year’s 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.”