Moody’s Upgrades Turkey’s Credit Rating, Cites Governance Improvements
In a notable development on the international finance stage, Moody’s has upgraded Turkey’s credit rating, pointing to significant improvements in governance and strides made in addressing inflation issues. This upgrade reflects a cautiously optimistic view of Turkey’s economic trajectory, despite ongoing challenges including a cost-of-living crisis that has gripped the nation.
The decision from the global ratings agency comes amidst a broader context wherein Turkey’s leadership, headed by President Recep Tayyip Erdoğan, has shifted strategies in response to mounting economic pressures. For much of his tenure, President Erdoğan has been known for his unconventional stance on interest rates and inflation. However, faced with soaring inflation rates that have severely impacted living costs, there has been a notable pivot towards embracing interest rate hikes as a tool to stabilize the economy.
As of June, Turkey’s annual inflation rate was reported at 71.6 percent, a slight relief from the 75.45 percent peak observed in May. This improvement in inflation figures is a backdrop against which Moody’s has recalibrated its outlook on Turkey’s economy, raising the sovereign credit rating from B3 to B1, while retaining a “positive” outlook.
The rationale behind this upgrade, as Moody’s articulates, centers on “improvements in governance, more specifically the decisive and increasingly well-established return to orthodox monetary policy.” The agency’s faith in Turkey’s monetary policy reforms is further underlined by observations of moderating inflation and domestic demand, fostering a belief that inflationary pressures will significantly diminish in the months leading into 2025.
The acknowledgment of Turkey’s efforts towards bolstering the credibility of its monetary policy—key to restoring confidence in the Turkish lira—is accompanied by a note of caution from Moody’s regarding ongoing political risks, which are seen as a persistent constraint on the rating.
Recent economic hardships, typified by a steep rise in consumer prices and a sharp depreciation of the Turkish lira, have led to significant political repercussions for President Erdoğan and his Justice and Development Party (AKP), impacting their performance in municipal elections earlier in March.
Despite these setbacks and the lingering political uncertainties, Moody’s assessment suggests a tilt towards the positive, pointing to “the balance of risks… skewed to the upside.” The report emphasizes that, with the enhancement of monetary policy effectiveness, Turkey stands a chance to bolster macroeconomic stability and strengthen its institutional frameworks. Such developments could amplify the country’s inherent strengths, notably its diverse and competitive economy.
Furthermore, Moody’s posits that the current shift towards more orthodox economic policies, if paired with significant structural changes, could mitigate the risks of enduring inflation shocks, thereby charting a path for sustained economic recovery and growth.
This rating upgrade from Moody’s presents a cautiously optimistic outlook for Turkey’s economic recovery efforts, highlighting both the progress made and the considerable tasks that lie ahead in securing a stable and prosperous economic future for the country.
