Country risk: Why Turkey deserved to be upgraded


Matthew Turner
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Upgrade by Fitch only confirms analysts’ improved perceptions of Turkey’s sovereign risk profile over the past decade.


The decision by Fitch to upgrade Turkey’s long-term foreign-currency rating to BBB- from BB+ finally brings the rating agency into line with the long-held views of market participants.

Economists have long pointed out that Turkey’s resilience to the global economic slowdown should make it worthy of investment-grade status. While much of Europe has slid inexorably into recession, sound economic policies have left Turkey’s economy sheltered from the contagion effects from the eurozone debt crisis.

The renewed vigour of Turkey’s economy over the past decade is reflected in data from 

Euromoney’s Country Risk Survey (ECR, see chart). The sovereign has risen 33 places in the ECR global rankings since September 2002. Back then, Turkey’s ECR score was 48 points adrift from the EU average, but this differential has narrowed to only eight points – with Turkey outperforming eight of the 27 EU member states.

Turkey’s resilience stems from the fact that it 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,” says Cihat Takunyaci, country manager at BNY Mellon and a member of ECR’s expert panel.

Turkey’s reputation for sound macroeconomic management was boosted by the fact that no Turkish banks fell into difficulty during the global financial crisis. Moreover, it remains one of the few countries in the region not to add to its net debt load since the height of the crisis.

All of this raises the question why it has taken the agencies so long to upgrade Turkey to investment grade? Capital Economics notes: “The decision by Fitch is likely to have only a limited impact on financial markets since the move seems to have been already priced in by investors.”

Turkey’s improved country risk score was boosted by strong results in the survey’s Access to Capital Markets Indicator, which has continued to improve this year. Charting the willingness of syndicate heads at money-centre banks to arrange bank finance for Turkish corporates and the sovereign, the two-point improvement since March 2012 is a telling sign that analysts’ perceptions of Turkey’s country risk profile are improving. The robust growth prospects of the country, its sound macroeconomic and regulatory framework and stable banking sector appear to have boosted investor confidence in Turkey.


But some analysts have sounded a note of caution following the decision. Emri Deliveli, Economics Columnist at Hurriyet Daily News, says, “The decision by Fitch is like giving an alcoholic more alcohol. While investment grade will help attract healthier, longer term capital flows, Turkey’s dependence on foreign capital remains a key weakness, and the upgrade could prove counterproductive if it encourages a surge of hot money into the country.”