Turkey’s upgrade to investment grade was overdue, some analysts say, while others believe it will not make a huge difference to investors
Fitch Ratings’ upgrade of Turkey to investment grade may have a limited impact on markets as the move was expected, with some analysts calling it “overdue.”
“At last! This has probably been the longest market wait in any asset class ... and Fitch will certainly not regret having been the first to move,” Simon Quijano-Evans, EMEA strategist at ING, wrote after the announcement of the decision by Fitch.
“Turkey’s fiscal backdrop is the best in either western or eastern Europe,” he said, adding that “it also has the most attractive multi-decade population dynamics in the region,” meaning an increase in the income tax base.
Fitch raised Turkey’s long-term foreign currency rating to BBB- from BB+, with a stable outlook, citing “an easing in near-term macro-financial risks as the economy heads for a soft landing” and “a moderate and declining government debt burden, a sound banking system, favourable medium-term growth prospects.”
It is the first time since 1994 that Turkey is rated investment grade. The other two big agencies, S&P and Moody’s, still have Turkey at “junk.” Yields on two-year debt fell 17 basis points to 6.88% after the rating was raised, according to Bloomberg, which said the bonds, which have had a 15% return this year, have been the best in major markets worldwide.
The Turkish lira (TRY) jumped following the announcement of the decision.
“The immediate-term effects will be a further supportive for the TRY to start with (even at these levels), followed by even further secular downside potential for spreads and especially yields. Indeed we continue to see the Turkish domestic bond market as the best placed in the region for multi-month and multi-year yield compression,” Quijano-Evans said.
NO GAME CHANGER
Other analysts say the upgrade is unlikely to be a game changer.
“History suggests that ratings changes tend to lag rather than lead moves in financial markets,” said Neil Shearing, chief emerging markets economist at Capital Economics.
“This decision was generally well anticipated and follows a period in which the Turkish bond and equity markets have outperformed their EM peers.”
Shearing, while agreeing that Turkey’s fiscal position is solid and that its banking sector is well capitalized, said he was “less sanguine on the near-term macro-financial risks.”
“The current account deficit has narrowed over the past year, but remains large and is overwhelmingly funded by relatively short-term capital inflows,” he said.
“Meanwhile, short-term private sector external debt is rising. Accordingly, we think that Turkey remains among the more vulnerable emerging market economies to a renewed spike in global investor risk aversion,” Shearing added.
Earlier Capital Economics analysis showed the short-term external debt of Turkish banks exceeding $70 billion this year, higher than the debt of other private sector entities, which was estimated at around $60 billion.
The analysis also showed that the recent economic downturn caused a surge in non-performing loans (NPls), which are up by almost 25% in absolute terms from their post-crisis trough in September last year. Capital Economics analysts believe NPLs “have further to rise” and that the risk they pose is not priced in the market.
Turkey’s main weakness remains its external position, Fitch said. The agency forecasts a fall in the current account deficit to 7.3% of GDP this year for Turkey from last year’s 10% of GDP, but sees the deficit barely moving, at around 7.2% of GDP, next year, “which, together with maturing external debt payments, exposes the country to shocks to global liquidity.”