The coveted investment grade rating has arrived in Turkey and foreign capital may follow – possibly a lot of it. But here's the multi-million lira question: What kind of cash will it be?
What Turkey desperately wants is long-term bricks-and-mortar investment into factories and infrastructure.
What it is more likely to get initially is more interest in already booming stock and bond markets – and possibly a fresh battle in its war against currency appreciation.
An investment grade rating, which Moody's gave Turkey on Thursday, potentially opens Turkey to more conservative funds. It could lead to inclusion in global debt indices tracked by trillions of dollars and might cut borrowing costs for the government and companies.
"This could bring a whole new investor base to Turkey," says Tim Ash, head of emerging markets research at Standard Bank.
Not surprising then that bond yields tumbled to fresh record lows, stocks hit new all-time highs. Average yields on Turkish sovereign dollar bonds fell to around 3.6 percent, trading for the first time below erstwhile emerging markets darling, Brazil.
But compare this to what an investor would receive on "safe" bonds from the United States or Germany or the 4 percent or so that debt-ridden Spain is paying for 10-year euro risk.
An investment grade Turkey might well attract that marginal yield-seeking dollar.
"Turkey is a great example of an economy … where the debt-to-GDP ratio is shrinking," said Arvind Rajan, international chief investment officer in the fixed income division at Pramerica, the asset management arm of Prudential Financial
"With negative real yields showing on most developed market bonds, investors might as well increase exposure to those types of emerging market economies where they are still hugely underweight," Rajan said.
NOT GAME CHANGER
But the promotion to investment grade, while welcome, is not a game-changer.
Turkey already trades as an investment grade market and despite the latest rally, the move is unlikely to be a significant trigger for more huge inflows, says Angus Halkett, a fund manager at Stone Harbor Investment Partners in London.
At last count, Turkey had a record $150 billion in overseas investment in its stock and bond markets. Two-thirds of Istanbul's equity free float is in foreign hands and Turkey is fund managers' biggest net overweight in emerging markets, a Bank of America/Merrill Lynch poll showed this month.
The proof is also in debt insurance costs that are below those of investment grade peers, Russia and South Agrica, and in bond yields that are negative when adjusted for inflation.
"There may be some extra positive impetus, the market is squeezing a bit out today but in terms of price there is not a great deal more juice left in Turkish bonds," Halkett says.
Many argue that the last thing Turkey needs is more portfolio capital, which is quick to take fright if the global – or local – backdrop changes and which drives up the lira, forcing tech central bank to cuts rates as it did on Thursday.
Turkish authorities are not oblivious to the risks. A central bank paper last year warned that currency appreciation, current account deterioration and higher credit growth usually ensue in emerging markets after promotion to investment grade.
And Finance Minister Mehmet Simsek acknowledged at a conference in London a need to manage "implications associated with investment grade."
"Investment grade can lead to excessive build up of risk and we may have to look into that … we can always step in to stop corporates from borrowing if needed," he said.
What Simsek and his colleagues in government are hoping for is a bonanza of foreign direct investment (FDI) in a country which is still bedevilled by poor infrastructure and poverty.
FDI is more desirable than portfolio flows, simply because it is less volatile but it covers less than a fifth of Turkey's whopping balance of payments deficit.
Simon Quijano-Evans, head of emerging markets research at Commerzbank, Turkey, agrees, noting an FDI pickup in Brazil following its ascent to investment grade in mid-2008.
"Probably the main positive of the Moody's move is that it will start to help change the view of foreign direct investors," he said, noting Turkey currently has the biggest current account deficit of all big emerging economies, if net FDI is included.
"This is the one priority area for Turkey."
