How will Fitch upgrade affect Turkish economy

The announcement that has long been awaited about intentional rating agency Fitch’s upgrade of Turkey’s rating to “investable country” came on the first day of the week and put a spring in the step of the markets.

Another positive figure that was announced the same day was about October’s inflation rate. While the markets expected about a 2.3 percent increase in consumer prices, the rate was 1.96 percent. This rate is still high, but again, it was welcomed because the figure gives hope of reaching the end of 2012 with the inflation rate of 7.4 percent set by the Central Bank.

Fitch’s upgrade was the most important reason for the positive atmosphere in the markets. Actually, the markets were waiting for the upgrade for almost a month.

There was also the possibility that Fitch would only change the outlook to positive – which it had previously changed to negative. One reason for the enthusiasm experienced upon news of the upgrade is that the concern was proved wrong and the expectations were confirmed.

The outlook’s effects on the markets are not expected to create exaggerated waves from now on. Market experts who say that this positive news had been bought beforehand agree to a great extent that the markets will return to normal in a couple of days.

The upgraded outlook that showed its effect on share prices and basic yields is not expected to have much influence on exchange rates. Recently, because of the acceleration in the hot money flow, exchange rates were already down, in other words the Turkish Lira had improved seriously. After this, any new gain by the lira would be regarded as unfavorable in terms of macro balances.

In other words, in the case of the lira being overvalued, there is the probability of an increase of imports again and an excessive recovery of domestic demand with fallen interest rates. The economic administration, for some time, has targeted a cautious slowdown and has taken measures to such ends. If exchange and interest rates simultaneously suffer a sharp fall, then there is a danger of upsetting the balance provided and the widening of the gap again between domestic and foreign demand. At the same time, it is a probability that scares the economic administration that the current account deficit will again start to increase.

For this reason the markets believe that the Central Bank and the economic administration will draw excess foreign exchange from the market to prevent exchange rates from falling much lower than their current level.

In short, an atmosphere of a new spring is being experienced, but the outcome of this atmosphere must be well managed.

For Turkey to maintain this outlook and for other rating agencies to join Fitch, it is vitally important that the improvement in the debt structure is preserved, fiscal discipline is continued and the strong banking structure is protected – all of which justified the upgrading.