Fitch had maintained Turkey's rating at “BB+,” one notch below investment grade.
The agency said on Monday that "the upgrade to investment grade reflects a combination of an easing in near-term macro-financial risks as the economy heads for a soft landing and underlying credit strengths including a moderate and declining government debt burden, a sound banking system, favourable medium-term growth prospects and a relatively wealthy and diverse economy."
"Fitch believes that the Turkish economy is on track to return to a sustainable growth rate, having narrowed the current account deficit (CAD) and lowered inflation after overheating in 2011. The agency forecasts GDP growth of 3 % in 2012, 3.8 % in 2013 and 4.5 % in 2014. Achieving such a rebalancing without a recession -- helped by a strong trade performance, while unemployment is at an 11-year low -- points to enhanced economic flexibility and resilience," Fitch said on its website.
In initial comments on Fitch's move, Turkish Deputy Prime Minister Ali Babacan, who is responsible for the government's economic policies, termed the decision “correct” but “belated.” “We hope other rating agencies take similar decisions without delay,” Babacan said.
The move triggered a rally in Turkish financial markets, with the lira firming against the dollar while the benchmark bond yield fell to 6.86 percent from 6.98 percent.
Fitch's move does not mean that Turkey will automatically be included in benchmark investment grade bond indexes because other agencies would have to move as well.
But the decision will be welcomed by Prime Minister Tayyip Erdogan, who has presided over the transformation of Turkey's economy in the last decade and who has long been critical of the ratings agencies' failure to award investment grade to Turkey.
Specifically, Fitch upgraded Turkey's long-term foreign currency Issuer Default Rating (IDR) to 'BBB-' from 'BB+' and the Long-term local currency IDR to 'BBB' from 'BB+'. The outlooks on the long-term ratings are stable.
Manik Narain, emerging market strategist at UBS in London, said many investors already treated Turkey as a quasi-investment grade bet.
"But at the end of the day this will create actual investment inflows and lower borrowing costs," Narain said.
Finance Minister Mehmet Şimşek said the upgrade would have a positive impact on risk perceptions and boost capital inflows and the country's growth performance.
The economy grew 8.5 percent last year but growth is expected to slow sharply to 3.5 percent this year as domestic demand weakens, prompting the central bank to ease monetary policy.
Erdoğan's Justice and Development Party (AK Party) government has kept the economy growing at an average 5 percent annually since it came to power in 2002, inheriting a basket-case which had just suffered a major financial crisis. Inflation has also come down to around 8 percent from triple digits in the late 1990s.
Many economists agreed with Babacan that the Fitch move was overdue. "Turkey should have long been investment grade status, given its proven willingness to pay in difficult circumstances. The external financing risks to the sovereign have long been overstated," said Standard Bank head of EM research Timothy Ash.
"This is a big confidence boost to Turkey, and should help attract a new investor base to Turkey. I would expect Moody's to follow, and eventually S+P - kicking and screaming!" he added.
Turkish sovereign dollar bonds rallied modestly, with spreads over US Treasuries tightening 5 basis points in contrast to the broader emerging markets index where spreads widened.