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Turkey rating upgrade to boost stocks, bonds: analysts
The second upgrade to investment grade status for Turkey, although priced in, is still likely to give a lift to the country's stock market and to its bonds
Rating agency Moody's raised Turkey's rating to Baa3 from Ba1 late on Thursday, citing "recent and expected future improvements in key economic and public finance metrics" and "progress on structural and institutional reforms."
The upgrade comes six months after a similar move by Fitch.
Moody's noted that Turkey's debt burden has fallen by 10 percentage points to 36% of gross domestic product since the beginning of 2009 and it expects the decline to continue.
Turkey's ability to finance its debt is supported by the low and decreasing share of foreign currency-denominated debt, which has fallen to 27.4% in 2012 from 46.3% in 2003, the rating agency said.
It also highlighted the increasing maturity profile of the central government's debt stock, which "reduces its vulnerability to interest-rate increases."
Gillian Edgeworth, chief EEMEA economist at UniCredit Research, noted that Turkey posted better than expected current account deficit data for March, partially due to a fall in oil prices, and April budget data showed the cumulative fiscal gap year-to-date at less than 25% of where it stood for the first four months of last year.
But she noted that in the first quarter of the year, the difference between the dynamic of imports – which rose by 4.2% in the period – and exports – which fell by 2.4% – "has not been this large since 2010."
The funding of the current account deficit, meanwhile, still shows high reliance of short-term inflows rather than long-term ones, Edgeworth added.
"Hopefully the shift to investment grade helps authorities to complement last year's narrowing of the current account deficit with an improvement in this composition of foreign capital inflows," she wrote in a market note.
FURTHER UPSIDE POTENTIAL
Analysts Can Yurtcan and Nilufer Sezgin from Erste Bank believe that, although there had been "significant outperformance both in the bond and equity markets," there is still further room to go in the medium term.
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Strong fundamentals and growth will differentiate Turkey from other emerging markets and there is more room for long-term yields to decline compared to other developed and developing countries, they said in a note.
They anticipate a decline in 10-year Turkish bond yields of around 50 basis points, and this could also be supportive for stocks.
The most important consequence of the rating upgrade, according to the Erste Bank analysts, will be "the continuation of the low interest rate environment in Turkey."
They raised their target for the BIST-100 index BY 12% to 98,000, offering a 7% upside potential. Interest rate-sensitive sectors, such as banks, consumer discretionary and real estate will "remain in the spotlight," according to the Erste Bank analysts.
The upgrade is "unlikely to have a direct significant impact on the GDP growth and the current account deficit," said Bank of America Merrill Lynch analyst Turker Hamzaoglu, but it means the country will have access to longer-term and better qualify funding from abroad, which will have " a significant positive impact on the country’s private sector."
Hamzaoglu believes an upgrade by S&P is likely to follow shortly.- Follow us on twitter @emrgingmarkets
