Turkey has received its second credit rating upgrade in six months from Fitch Ratings, highlighting improved external buffers and a significant increase in reserves, Bloomberg reported.
Fitch upgraded Turkey’s credit rating to BB- from B+, placing it three levels below investment grade with a stable outlook. This adjustment aligns Turkey’s rating with countries like South Africa, Armenia and Jordan.
The upgrade comes as Turkey’s reserve composition strengthens, with the central bank’s net foreign exchange position improving from a negative $75 billion in early April to a positive $6 billion by the end of August, according to Fitch’s statement.
Since the local elections in March, Turkey has experienced significant de-dollarization among residents and a surge in capital inflows, attributed to increased confidence in the country’s economic policies.
However, Fitch noted that the rating still indicates elevated vulnerability to default, especially if adverse changes occur in business or economic conditions over time. “Our baseline is that the current economic program maintains support from the political leadership,” the ratings company stated. “Nevertheless, the risk of policy reversals remains present,” it added, citing potential resistance to high interest rates at the political level and from lobby groups.
President Recep Tayyip Erdogan had previously endorsed ultra-low interest rates until the national elections in May 2023, prioritizing rapid economic growth over price stability. These policies led to foreign investor withdrawal and triggered an inflation crisis. Since then, Erdogan has refrained from publicly intervening in economic policy and has appointed reputable policymakers to restore the nation’s financial standing.
Policy changes include much tighter monetary and fiscal measures. The benchmark interest rate has been maintained at 50 percent for the past five months as officials aim to reduce inflation. While price gains have eased from 75 percent levels seen earlier this year, inflation still hovers around 50 percent.
Fitch expressed “greater confidence” in the maintenance of restrictive monetary policy, expecting an easing cycle to begin in early 2025. The agency forecasts year-end inflation at 43 percent, higher than the central bank’s target of 38 percent.
“Given the still high projected level of inflation, the premature easing of monetary policy or the abandonment of the current policy direction, which is not our base case, could reignite inflationary pressures and consequently macro-financial stability and balance of payments risks,” Fitch warned.
The agency also anticipates significant fiscal adjustments and a minimum-wage increase at the start of 2025 that is “more aligned with the objective of reducing inflation” to help cool domestic demand.
This latest upgrade follows Fitch’s previous raise of Turkey’s rating to B+ from B with a positive outlook in March. Turkey has also received credit rating upgrades from S&P Global Ratings and Moody’s Corp this year.
