Standard and Poor’s upgrades Turkey’s credit rating to B from B-

ANKARA (Reuters) – Investors yesterday welcomed a Standard and Poor’s upgrade of Turkey’s debt rating as a sign that minor deviations from targets under the country’s IMF pact would not lead to significant sales on its financial markets. S&P upgraded Turkish debt to B from B- citing progress on delayed International Monetary Fund-backed reforms, seen as key to reducing the cost of servicing Turkey’s massive debt burden. Ankara signed its $16 billion pact with the IMF after a financial crisis in 2001 forced it into a multibillion-dollar bailout of troubled banks. «It’s a nice surprise. It appears that small slippages in the program won’t affect things too much. They (S&P) have followed the trend in the lira, treasury yields and general market confidence,» said Volkan Kurt at ABN Amro in Istanbul. Turkey hopes the IMF’s executive board can meet ahead of a two-week recess on August 4 to approve a $500 million loan tranche, delayed since early June. Turkish debt and shares edged up yesterday as investors gave a muted response to the upgrade. Yields on the most active August 18, 2004 debt dipped to 47.60 percent from 48.37 percent on Friday and the main share index edged up 0.35 percent to 10,598.30 points, adding to gains of 0.82 percent on Friday. «The impact of the rating upgrade news was limited. The (share) index is moving in an increasingly narrow range and having trouble finding direction,» said Murat Inceleme at Garanti Asset Management in Istanbul. The lira ended at 1,416,000 against the dollar, down slightly from a close of 1,415,000 on Friday. Most analysts expect Turkey’s Parliament to tackle remaining social security reform laws this week and the ruling Justice and Development Party (AK) to take steps on the budget needed to satisfy IMF directors. «The upgrade reflects the broad progress that the government of Turkey has made under its IMF-supported program, albeit with delays and slippages,» said Standard and Poor’s credit analyst Ala’a Al-Yousuf. Ratings on Turkey, one of the IMF’s biggest debtors, remained constrained by its high public sector debt and limited fiscal flexibility, S&P said. Moody’s currently rates Turkey at B1, one notch above the S&P rating. Most investors say Turkey will have no problems rolling over a debt load of some $125 billion in 2003, but also that real interest rates, the difference between debt yields and projected inflation are still uncomfortably high. Yields on benchmark August 18, 2004 domestic debt stand at around 48 percent against a year-end consumer price inflation (CPI) target of 20 percent year-on-year. Ankara has pledged the IMF extra measures to meet a primary surplus target for its national budget of 6.5 percent of gross national product. Analysts see the target as a key indicator of whether Turkey can pay down its debts without incident. S&P said it expected the government to miss the primary surplus target by about 0.5 percent in 2003 and 2004, but said Ankara would likely make sufficient progress on economic reform to maintain positive market sentiment. Turkish debt yields have fallen and the lira has firmed some 20 percent against the US dollar since late March, when fears about the economic fallout of war in neighboring Iraq began to subside. Public sector debt in Turkey is expected to remain high at just over 70 percent of gross domestic product in 2003.

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