LONDON (Reuters) – Fitch Ratings has upped Turkey’s local currency rating to ‘BB,’ citing improvement in public finances and the economy, but left the foreign rating at ‘BB-‘ because of the country’s high external debt burden. The outlook on both ratings is stable. Analysts said the Fitch move was the first in what would be a series of upgrades for Turkey as it relaunches reforms and tightens fiscal discipline after elections in July and August. Fitch forecast Turkey’s real economic growth at 4.3 percent this year while gross domestic product (GDP) per capita would reach $6,615, double the ‘BB’ range median. «The local currency upgrade reflects secular improvements in the public finances, income levels and the structure of the economy, as well as some easing in political risks since the summer,» Edward Parker, head of emerging Europe sovereigns at Fitch, said in a statement. «However, the country’s sizeable external financing requirement currently constrains its foreign currency rating against the backdrop of a more challenging global financial environment.» Fitch noted that fiscal discipline had cut the public sector budget deficit to 0.7 percent of GDP in 2006 from 17.6 percent in 2001 and predicted general government debt to fall to 54 percent of GDP at end-2007 from 61 percent a year ago. But political risk weighs on the ratings along with external finances, it warned. Gross external debt is seen at 55 percent of GDP at year-end, above the ‘BB’ range median of 31 percent. «Turkey’s substantial external financing needs mark it out as exposed to global sentiment,» Fitch said. The current account gap, swelled by oil and other imports, is proportionally one of the biggest in emerging markets, and is financed partly by foreign investment flows. Interest rates Fitch also said the central bank’s policy of cutting interest rates when inflation is well above target «runs the risk of a setback to disinflation.» The central bank started easing interest rates in September. Inflation, at 8.4 percent in November, is more than twice a year-end target of 4 percent but the bank says inflation has been driven by one-off factors and it will fall again in the medium-term. «We have been looking for an upgrade for some time now and this is the first in a string of upgrades in our view,» said Simon Quijano-Evans, economist at Unicredit MIB, noting a falling debt-to-GDP ratio and the government’s fiscal and inflation-targeting policies. The lira firmed to 1.1710 after the Fitch statement from 1.1720 before. Economists also emphasized that the upgrade was only for local currency debt. «In that sense, we believe that the rating upgrade should not mean that Turkey gets closer to the investment grade level,» said Raymond James economist Ozgur Altug. But he forecast the foreign currency rating would be upgraded once a long-delayed social security reform is passed and a planned restatement of gross domestic product is published. Ankara has said the welfare package will be passed at the end of the month. Standard & Poor’s has a BB- long-term foreign currency credit rating for Turkey and a BB long-term local currency credit rating. Moody’s has a Ba3 rating on foreign- and local-currency debt.