Fitch Ratings said on Monday that Turkey and its banking sector can withstand the economic fallout from the Iran war if the disruption is brief but warned that a longer conflict or deeper regional instability could create more serious risks for the country’s sovereign rating and financial system.
In a Fitch Wire note, the ratings agency said the main risks would remain contained under its baseline scenario, which assumes that the conflict and any closure of the Strait of Hormuz are short-lived. Fitch said Turkey’s foreign exchange reserve buffers and the authorities’ commitment to tight monetary and fiscal policy would help limit the damage.
The warning comes as Turkey faces pressure from rising energy costs and market volatility linked to the conflict involving Iran, Israel and the United States. The war had already pushed oil prices sharply higher and forced emerging market central banks, including Turkey’s, to reconsider plans for interest rate cuts because of renewed inflation risks.
Fitch said Turkey’s central bank had shown its commitment to curbing inflation by effectively tightening policy from March 1, steering liquidity to the overnight lending rate of 40 percent while keeping the main policy rate at 37 percent. Turkey’s central bank kept that benchmark rate unchanged on March 12 and said geopolitical uncertainty, weaker global risk appetite and higher energy prices were clouding the outlook.
Fitch said it expects monetary policy to remain relatively tight through the year and forecast a real policy rate of 4.5 percent at the end of 2026, helping bring inflation down to 25 percent by year’s end. It also said the government’s temporary fuel price mechanism and lower budget deficit provided room to cushion some of the immediate impact.
At the same time Fitch pointed to areas of vulnerability. It estimated that central bank interventions to slow the lira’s depreciation against the US dollar in March had already cost just over $20 billion. Fitch said net foreign exchange reserves excluding swaps stood at $57 billion as of March 11, only slightly below the level at the end of 2025, but warned that a large decline in reserves could lead to negative rating action on the sovereign.
A longer period of high oil prices would likely push inflation higher and increase Turkey’s current account deficit, Fitch said, because the country depends heavily on imported energy. It added that those risks would grow if political leaders were to interfere more in economic management and loosen policy settings. Fitch said the chance of direct spillovers from the war becoming large enough to significantly affect credit ratings remained low, but did not rule out that possibility.
The agency also said Turkish banks appear broadly able to absorb the shock under its baseline scenario. It noted that 22 banks are rated at BB-/Positive, in line with or constrained by the sovereign rating, and said liquidity and capital buffers are generally adequate. Fitch said foreign currency liquidity should be sufficient to cover upcoming short-term debt repayments and that deposit dollarization has remained contained so far.
Still, Fitch said a more severe scenario could put pressure on banks’ refinancing capacity and foreign currency liquidity, especially if market access were disrupted for an extended period. It also warned that persistently high lira interest rates, inflation and currency weakness could hurt profitability, worsen loan quality and erode capital buffers.
Turkey, which sits between Europe and the Middle East and imports much of its energy, is exposed to swings in oil and gas prices during regional conflict. Fitch’s message was that the country can manage a short shock but that its ability to do so will depend on whether policymakers stick to orthodoxy and whether the war remains contained.