Turkey’s Sovereign Rating Raised One Level Below Investment Grade

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Standard & Poor's on Wednesday upgraded Turkey's sovereign credit rating from BB to BB+, placing the nation one level below an investment-grade rating and setting the economic outlook to stable.

In a statement, cited by the Financial Times, S&P said that the upgrade reflected Turkey’s gradual rebalancing of their economy; and lauded the Turkish government for making progress made in solving the Kurdish problem.

“During 2012, Turkey’s current account deficit narrowed by 4 percentage points to around 6 percent of GDP,” S&P noted. “Economic growth eased to what we view as a more sustainable level, without undermining Turkey’s relatively strong fiscal performance.”

“The upgrade also reflects progress made on resolving Kurdish issues. We expect this to be more lasting than previous efforts: if so, security-related costs would decline and the regional economy, as well as cross-border trade flows, would be boosted,” the ratings agency added.

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In remarks carried by Turkish television broadcaster NTV, Turkey's Finance Minister Mehmet Simsek welcomed the upgrade as "encouraging”; but said, "we deserve a higher credit rating.”

Still, S&P saw further risks arising from the macroeconomic policies issued out ahead of upcoming municipal elections in 2014 and parliamentary elections the following year.

“Savings in the general government deficit in 2012 were mainly due to lower borrowing costs, rather than any improvement in the primary position. We estimate that the general government primary position actually weakened from a surplus of 1.4 percent in 2011 to near balance in 2012.

“Although we expect the fiscal deficits during 2014-2015 to remain around 2.5 percent of GDP, the underlying fiscal stance could weaken further. Historically, economic policies have tended to prioritize growth, with less focus on its composition,” S&P said.

S&P also called for the government to continue maintaining its policies related to limiting foreign currency lending, capping nominal credit growth, and moving on to a floating foreign-exchange regime.

“These factors will help the Turkish economy to adapt, should the external liquidity environment worsen in 2013-2014,” they said.

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Conversely, should rapid credit growth re-emerge, current account deficits widen substantially, or external leverage of the Turkish economy increase, S&P could re-lower Turkey’s ratings.

“We could also consider a downgrade if Turkey faces a more abrupt adjustment when debt and equity inflows either reverse or become more costly. Additionally, we would consider a downgrade if fiscal policy were loosened significantly in the context of the upcoming electoral cycle.”