Türkiye Eyes Rating Upgrade in November with Improving Net Reserves, Narrowing Account Deficit

Türkiye could see a new rating upgrade in November with its improving net foreign currency reserves and quickly narrowing current account deficit.

Since the shift Türkiye has gone through in its macroeconomic policies over the year, the country witnessed the largest international credit rating agencies’ upgrade decisions.

Fitch Ratings upgraded Türkiye early this month to ‘BB-‘ with outlook stable after its rating upgrade decision in March 2024. Moody’s raised Türkiye’s sovereign credit rating ‘B1’ from ‘B3’, with a positive outlook, marking the first upgrade decision in a decade while S&P Global Ratings upgraded Türkiye to ‘B+’ on economic rebalancing with a positive outlook.

S&P Global Ratings is expected to announce its second assessment on Türkiye on Nov. 1.

“A few credit metrics for the Turkish economy have improved, particularly external indicators. We estimate that net foreign currency reserves at $105 billion are well over twice of what it was last year,” Frank Gill, sovereign ratings senior director at S&P Global Ratings, told Anadolu in an exclusive interview.

According to S&P’s definition of net reserves, it excludes foreign currency borrowed from domestic residents like domestic commercial banks, by subtracting banks’ foreign currency deposits at the Turkish Central Bank and also subtracting banks foreign currency forwards lending to the Central Bank.

“We consider this definition of net reserves best measures the reserves available to the Central Bank to meet unexpected net external financing, and or to intervene in domestic foreign currency markets,” he noted.

Current Account Deficit Narrowing Quickly

Gill said Türkiye’s current account deficit is also narrowing very quickly, reflecting a lower energy bill with Brent oil prices continuing to soften as well as lower net gold imports.

“We are forecasting that the current account deficit will be slightly above 1% of GDP for 2024 as a whole,” he said, adding that these two factors are “big deal” and positive and the rating action is largely on those two factors. “I think this is a big change on the external side,” he said.

However, Gill said there are also a lot of indicators that are going to be reviewed to reach this decision as one of the big questions for them is what is the direction of public finances in the country as well as if Türkiye will maintain the same course of policies for multiple years.

He said their baseline projection is that they will, but there are risks to their baseline, in particular, “austerity fatigue.”

In that regard, to the question of if an upgrade for Türkiye is still possible in November, Gill said: “Sure, when we do have a positive outlook. I think it is a big deal that net reserves are now above $100 billion comfortably and that the current account deficit is narrowing.”

Gradual Disinflation Process Ahead, Single-Digit Inflation in 2027

S&P Global Ratings will also be closely watching the interest rate policy of the Turkish Central Bank.

Given the headline inflation is over 50%, it would be a risk if the Central Bank eases monetary policy too soon, according to Gill.

“If that were to trigger more volatility in the exchange rate, that would really quickly pass on to inflation. There is still a very strong relationship between the exchange rate and headline inflation. We will watch that as well as the next wage agreement early next year,” he noted.

Türkiye’s annual consumer inflation rate eased to 51.97% in August, the lowest since July 2023, according to official data released early this month. On a month-on-month basis, the consumer prices index rose 2.47% in August, slowing from July’s 3.23%.

Turkish Central Bank on Thursday left the benchmark one-week repo rate unchanged at 50% for the sixth straight meeting, in line with expectations.

The bank reiterated its cautious stance against inflationary risks.

“The tight monetary stance will be maintained until a significant and sustained decline in the underlying trend of monthly inflation is observed, and inflation expectations converge to the projected forecast range,” the bank said in a statement.

Gill said he expects the Turkish Central Bank to “make very cautious monetary rate cuts during the fourth quarter of this year, perhaps starting in November.”

“It takes a long time to bring down elevated inflation. Services inflation remains very high but goods inflation is coming down faster than expected while food inflation has also been easing,” Gill said.

S&P Global Ratings forecasts 43% for year-end inflation, 23% for the end of 2025, and about 10% for the end of 2026. In 2027, inflation comes down below 10% at the end of the year.

“Thus, we do not project single-digit inflation until 2027. We are forecasting a gradual disinflation but the emphasis is on gradual. We think one of the pillars of the disinflation plan is to maintain only slight depreciation of the lira against the dollar and euro and maybe a slightly riskier pace of depreciation, but next year the Turkish lira is still going to depreciate by less than inflation,” Gill said, adding that once adjusting relative inflation between Türkiye and its partners, the Turkish lira is “quite strong, arguably overvalued.”

Credit rating agency Fitch expects Türkiye’s inflation to decline to 43% by the end of this year and 21% by the end of 2025. According to Türkiye’s recently announced medium-term economic program, inflation is expected to be at 41.5% by the end of this year and at 17.5% at the end of 2025.

“Thus, in our view, by the end of this year, the policy rate of the Central Bank of Türkiye would be above the headline inflation. We forecast inflation to be at 42-43% by the year end, so we certainly would not expect policy rate to be below 45% by the end of this year,” he noted.

As the demand has started to weaken in Türkiye, S&P Global Ratings expects 3.6% economic growth this year in the country while it will slow down to around 2% next year.

“We do not expect a recession in Türkiye. After slowdown in 2025, we expect a recovery at above 3% in 2026. Türkiye could have a sharp slowdown, as in 2019 for example, but we do not project negative growth for any calendar year,” Gill said.

“Türkiye is a very resilient economy, it has an extremely resilient private sector, is diversified and open, and it has a Customs Union with the EU. So it has a number of advantages that other emerging markets like Argentina or even Brazil do not have, in particular a far more open economy, meaning that if domestic demand is weak, companies can focus on sales abroad.”

Türkiye’s GDP growth aimed to accelerate to 3.5% next year, 4.5% in 2026, and 5% in 2027, according to the government’s medium-term economic program.

Gill concluded that the government has an ambitious fiscal target for next year and most of the fiscal tightening will kick in next year.