By Yeliz Candemir

ISTANBUL—Back in November, it seemed like only a matter of time.

Turkish assets were leaping to record highs after Fitch Ratings awarded Turkey its first investment grade credit rating for nearly two decades. With Turkey’s economy rebalancing more rapidly than expected, market analysts confidently predicted Standard and Poor’s and Moody’s Investors Service would also upgrade Turkey in 2013, a move that promised to send waves of fresh foreign investment to the Turkish economy.

But in recent weeks, confidence over fresh ratings upgrades has been replaced by uncertainty.

As Turkey’s economy has picked up since January following a sharp slowdown last year, ratings firms have again highlighted the resurgent risk of Turkey’s key economic weakness: an expanding current-account deficit.

Fitch Ratings said on Thursday that although economic developments in Turkey have been favorable since they awarded Ankara an upgrade, the economy would remain “volatile” and “vulnerable to shocks.” The remarks, made in a conference in London, appeared to signal a negative shift in tone from the rater which until recently had been overwhelmingly positive.

Analysts said the caution would effectively scupper the prospect of other ratings firms bumping Turkey to investment grade.

“Given Fitch’s comments, I guess it is now very unlikely that either Moody’s or S&P will give Turkey that much sought-after second investment grade rating any time soon,” said Tim Ash, head of emerging markets research with Standard Bank and long-time advocate of a Turkey upgrade. “Indeed, I no longer expect it this year, unless we see the Turkish economy re-accelerate on the growth front this year but with no widening in the current-account deficit, which I think is unlikely.”

Turkey’s current-account deficit, or short-term international funding needs, narrowed to 6.1% of gross domestic product last year from a massive 10% of GDP in 2011, after a sharp slowdown of the economy reduced booming consumer demand which had fueled the finance gap. That rebalancing was faster than expected, lauded by markets as evidence that Turkey’s economy was on a more secure path.

But expectations that the economy will grow 4% this year after an estimated growth rate of 2.5% in 2012 is feeding investor nerves that rising consumption may again widen the current-account gap to around 7% of GDP.

Latest data showed that Turkey’s trade gap widened in January for the first time since October 2011 signaling that, for some economists, the rebalancing had come to an end. “The best is behind us as far as the external adjustment is concerned… A salutary external adjustment story won’t be there to support the lira this year,” Ilker Domac of Citigroup C +3.60% wrote in a research note.

Aggravating those concerns is central bank’s move to finance the deficit mainly through flows from foreign funds, leaving the economy vulnerable to the whims of international investors. In a bid to reassure investors, the central bank has repeatedly voiced its commitment to keep loan growth around 15% this year and rein in speculative capital inflow to avoid appreciation of the lira and widening of the deficit.

The upshot is that markets appear again to be eyeing the resurfacing of vulnerabilities (bad) rather than the continued rebalancing (good).

Moody’s said in January it kept the country’s Ba1 rating with a positive outlook in a credit opinion and it still emphasized “substantial external vulnerabilities” and said the government would snatch an upgrade to investment status by reducing its current-account deficit, cutting private borrowing abroad and building foreign-exchange reserves. Standard & Poor’s cautious ratings on Turkey’s economy have so irked Ankara that Turkey’s government refused to renew the rating agency’s license in January.

Fitch is betting Turkey’s current account deficit will be 6.5% of GDP this year, higher than the maximum 5% of GDP that most economists say is sustainable. Meanwhile, most analysts expect the deficit to remain elevated around 7% in 2013 as domestic demand is expected to rebound.

“We expect the current account deficit to be between 7.5% and 8% of GDP this year, indicating a significant deterioration… I think a rating upgrade window for either a Moody’s or S&P upgrade is gradually closing,” said Inan Demir, an economist with Finansbank, said in a phone interview.

Write to Yeliz Candemir at [email protected]