Fitch upgrades Turkey’s credit rating for second time this year

Fitch Ratings has upgraded Turkey’s credit rating with a stable outlook on improved external buffers as the country continues with its tight monetary policy to rein in inflation.

The company moved the nation’s sovereign rating one notch higher to BB-, from B+, it said in a report on Friday.

This is the second time the rating agency has upgraded Turkey’s credit rating this year after a similar move in March.

Turkey's reserve composition has strengthened and the central bank's net foreign asset position has improved from a low of minus $75 billion in early April to a positive $6 billion at the end of August on increased access to external borrowing and higher capital inflows, it said.

Turkey has been raising interest rates since last year to bring down inflation after it abandoned President Recep Tayyip Erdogan’s unorthodox policy of keeping interest rates low to spur growth.

Inflation fell from a peak of 75 per cent in May to 52 per cent in August as the central bank raised interest rate.

“Fitch has greater confidence that the maintenance of a tight monetary policy stance (with an easing cycle starting in early 2025), combined with projected fiscal consolidation and prudent minimum wage adjustments will support a significant decline in inflation and help maintain improved external liquidity buffers and low current account deficits,” it said.

Fitch expects inflation to finish 2024 at 43 per cent, resulting in average inflation of 59.5 per cent for the year.

Average inflation is expected to decline to 31 per cent in 2025, finishing the year at 21 per cent. Turkey’s central bank projects inflation at 38 per cent by the end of the year.

“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,” Fitch said.

Turkey’s central bank is expected to continue to maintain its tight monetary policy stance “until price stability is achieved”, its governor Fatih Karahan said last month.

The current account deficit is expected to remain low amid a tight monetary policy, improved export demand derived from the recovery in the eurozone, continued growth in tourism receipts and lower gold and consumer imports.

The central government deficit is also expected to ease slightly to 5 per cent of gross domestic product in 2024 from 5.2 per cent in 2023, “thus outperforming the budgeted 6.4 per cent”, according to Fitch.

In 2025, it is forecast to decline to 3.1 per cent of GDP and further to 2.8 per cent in 2026.

“Fiscal consolidation will be supported by a decline in spending related to earthquake reconstruction, increased expenditure discipline, the gradual reduction in electricity and gas subsidies, and tax revenue measures seeking to improve collection.”

The general government debt is also expected to continue to decline to 27.3 per cent of GDP, from 29.6 per cent in 2023.

“Our baseline is that the current economic programme maintains support from the political leadership,” Fitch said.

“Nevertheless, the risk of policy reversals remains present, given Turkey's recent history, the strong belief, at the highest political levels, in low interest rates and the potential resistance from vested interests and lobby groups.”

Turkey also received credit rating upgrades from S&P Global Ratings and Moody’s this year.