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Fitch upgrades Turkey’s rating to ‘B+’, outlook to positive

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Turkey’s financial standing has received a boost as Fitch Ratings on Friday upgraded the nation’s long-term foreign-currency issuer default rating (IDR) to “B+” from “B” while also revising the country’s outlook from “stable” to “positive.”

More than a decade has passed since Turkey received an investment grade rating from Fitch. However, from 2017 onwards, the country suffered a series of five downgrades, mainly due to President Recep Tayyip Erdoğan’s economic strategies, which boosted economic growth while jeopardizing the value of the lira and price stability.

Faced with a financial crisis characterized by a rising cost of living and a decline in foreign investment, Erdoğan recalibrated his approach after his re-election in May.

Since the elections in May, which gave Erdoğan another five years at the helm, Turkey has taken more aggressive steps to tighten monetary policy than expected, which has helped to lower inflation expectations and reduce external liquidity risks.

Fitch noted that Turkey’s international reserves experienced a significant rebound and stood at $131 billion at the beginning of March 2024, a notable increase from June 2023. Despite a temporary decline due to various factors such as lower portfolio inflows and election-related uncertainties, Fitch views this decline as temporary. The rating agency anticipates a further increase in reserves and expects them to reach $148 billion by the end of 2024 and $159 billion by the end of 2025.

Fitch also underlined the central bank’s efforts with substantial interest rate hikes and the implementation of a targeted credit policy, which the rating agency says have contributed to a slowdown in overall credit growth. These measures have successfully tempered inflation expectations, although inflation rates are projected to remain higher than Turkey’s rating peers.

On the external side, Turkey’s current account deficit is expected to narrow, Fitch says. The projections point to a decline of an account deficit of 2.6 percent of GDP in 2024, down from 4.2 percent in 2023. This improvement is expected to continue until 2025, with the deficit expected to narrow further to 2.2 percent of GDP.

However, challenges remain, Fitch states, including a high level of external debt maturing over the next 12 months, which is a potential vulnerability to changes in investor sentiment.

On the fiscal front, Turkey’s budget deficit widened to 5.2 percent of GDP, the largest since 2009, which Fitch attributes to earthquake-related spending. General government debt is estimated to have fallen to 30.4 percent of GDP in 2023, with projections pointing to stability in the coming years.

Economic growth in Turkey remains robust at 4.5 percent in 2023. However, tighter policy measures are expected to impact domestic demand, with growth slowing to 2.8 percent in 2024, while a slight recovery is expected in 2025.

Fitch also highlighted governance and geopolitical challenges, noting that governance indicators have deteriorated steadily over the past decade. Despite these challenges, the rating agency does not expect them to have a significant impact on the rating in the near future.

Factors that could lead to a positive rating include continued progress in fighting inflation and strengthening external buffers. Conversely, the lack of a consistent policy mix or a deterioration in the domestic or external situation could pose risks to the rating.

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