Turkey receives first debt rating increase, are two more far behind?

My 2012 estimate for economic growth in Turkey was 4% in January with an inflation rate stubbornly high at 8% for the year. After two years of above-8% economic growth, I went short-term neutral and long-term bullish on the country in January.

I was close on my growth forecast, GDP grew at 2.9% in the last quarter, but tough fiscal policies by the government have attracted investors and the country recently received the crown-jewel of economic news- a debt rating increase to investment grade.

Fitch Ratings increased the country’s debt to investment grade earlier this week on the government’s strong record over the last ten years. The administration of Prime Minister Erdogan has been able to reduce inflation from above 70% to just 7.8% this year and has cut public debt in half over the last decade.

An investment grade rating is a big step for the country, it not only lowers financing costs it will also improve sentiment from foreign investors and allow some large money managers to put money to work. Standard & Poor’s still rates the country two levels below investment grade, but investors may want to start increasing allocation to their portfolio now ahead of any further ratings increases.

The iShares MSCI Turkey Investable Market (TUR, quote) provides broad diversification across the market while exposure can also be gained through the regional funds and within some broader emerging market funds. The fund has gained 52% year-to-date but still trades for a reasonable 9 times trailing earnings of holdings.

Shares of the fund may have further to run on the investment upgrade. Standard & Poor’s raised the debt rating of Colombia to investment grade in March of last year. The increase was then followed by the other two rating agencies over the next three months. The Global X FTSE Colombia 20 (GXG, quote) easily outperformed the S&P500 and the MSCI Emerging Markets (EEM, quote) in the subsequent six-month and one-year time period. In fact, it topped the emerging market index by more than 10% in the six months following S&P’s initial rating increase.

Investors also have access to one depository receipt, Turkcell (TKC, quote).  The $11 billion telecommunications provider offers business and consumer services across the country with 54% of the market. The stock has gained 15.8% in the last twelve months and currently trades for 11.65 times trailing earnings. The company has a significant cash cushion on its balance sheet and should benefit as the penetration of telecom services grows to developed standards.

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