(Bloomberg) — Turkey secured its second credit rating upgrade in six months from Fitch Ratings, amid improving external buffers and a strong pickup in reserves.
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The nation’s score was upgraded to BB- from B+, three levels below investment grade, with a stable outlook on Friday. The move brings Turkey on par with the likes of South Africa, Armenia and Jordan.
Turkey’s reserve composition has strengthened and the central bank’s net foreign exchange position has improved from a negative $75 billion in early April to a positive $6 billion as of end-August, according to the Fitch statement.
Since the March local elections, Turkey has seen significant de-dollarization from residents as well as a pickup in capital inflows as a result of increased confidence in the policies.
The rating, however, still indicates elevated vulnerability to default, especially in the event of adverse changes to business or economic conditions over time, according to the issuer’s scale.
“Our baseline is that the current economic program maintains support from the political leadership,” the ratings company said. “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 as an example of the risk.
President Recep Tayyip Erdogan endorsed ultra-low rates up until the national elections in May 2023, prioritizing fast economic growth over price stability. The policies chased away foreign investors and triggered an inflation crisis. The Turkish leader has retreated from publicly intervening on economic policy since then and appointed well-reputable policymakers to restore the nation’s standing.
Changes in policy since then include much tighter monetary and fiscal stances. The benchmark interest rate has been kept at 50% for the last five months as officials try to bring down inflation. While price gains have eased from 75% levels seen this year, it’s still hovering at around 50%.
Fitch said it has “greater confidence” on the maintenance of the restrictive monetary policy, expecting the start of an easing cycle in early 2025. It sees inflation at the end of this year at 43%, higher than the central bank’s target of 38%.
“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,” it said.
Fitch expects significant fiscal adjustments and a minimum-wage at the start of 2025 “more aligned with the objective of reducing inflation” to cool domestic demand.
Fitch had raised Turkey to B+ from B with a positive outlook in March. Turkey also received credit rating upgrades from S&P Global Ratings and Moody’s Corp this year.
(Updates starting in first paragraph throughout with details from statement, background.)
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