UPDATE 1-Fitch upgrades Turkey to investment grade

ISTANBUL, Nov 5 (Reuters) - Fitch Ratings upgraded Turkey to investment grade on Monday, a move long coveted by Ankara, citing underlying strengths and an easing in near-term risks for the economy.

Among those strengths, Fitch highlighted a moderate and declining government debt burden, a sound banking system, favourable medium-term growth prospects and a relatively wealthy and diverse economy for the move.

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.

``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,'' Fitch said.

``Fitch believes that the Turkish economy is on track to return to a sustainable growth rate, having narrowed the current account deficit and lowered inflation after overheating in 2011,'' it said.

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.