Moody's held a teleconference yesterday to discuss 'Turkey at the cross-roads: Credit Dynamics of an Emerging Cross-Over Market.' Moody's said that the evolution of external risks will be the key driver of Turkey's credit rating going forward. Moody's detailed this phrase as follows: "[Evidence of greater resilience to BoP shocks] ...can be driven by structural reductions in the current account deficit, changes to the way in which the current account is financed and/or increases in buffers against these shocks." The overall tone of the teleconference was far from supporting upgrade expectations. Nevertheless, if we examine the details, an upgrade does not appear to be completely off the table. Recall that Moody's rates Turkey at Ba1, i.e. one notch below investment grade with a positive outlook.

Some points underlined in the webcast:

•Turkey's current Ba1 rating reflects the improvement in Turkey's public finances as well as policy actions against the C/A deficit.

•Moody's argues that the success of the innovative monetary policy framework is not yet certain

•Turkey's C/A deficit is estimated to decline to 7.6% of GDP by the end of the year, which is still high according to Moody's.

•Not only the level but also the way in which the C/A deficit is financed renders the country vulnerable to shocks. Although FDI was used to finance almost one-third of the deficit in the pre-crisis period, external financing is now dependent on short-term flows. Moody's warns that although the currency bears the brunt when there are BoP shock thanks to the floating exchange rate regime, domestic economic activity gets hit as well.

•While acknowledging the improvement in the FX reserves to historic highs thanks to the CBT's new Reserve Option mechanism, Moody's finds the reserves to GDP ratio quite low compared to other Ba1 countries.

•Although Moody's admits that the new pension fund system is a positive step, Turkey current saving rate is quite low compared to peers.

Moody's explanations hint that a rating upgrade is not likely in the short-term. A few points should be highlighted though:

•There is a potential 0.5ppt improvement in the C/A deficit level in the pipeline for 2013 on the back of a change in the estimation methodology for tourism revenues.

•Besides, the C/A deficit to GDP ratio will probably be much lower at around 6.5% of GDP by the forecast is not very up-to-date and the may be overstating the C/A deficit level in the short-term.

•Although the structural improvement in the C/A deficit can only be achieved in the long run, which rules out any support to the rating upgrade from that channel, the country's higher FX reserves comes alongside an improvement in the FX reserves/short term external debt ratio. This is important because Moody's argues that the C/A deficit level is not the only measure that determines the rating decision and vulnerability indicators like reserves/debt ratios are also important. end of the year according to the latest figures. So, it seems that Moody's.

Source: bne