Türkiye’s finance chief welcomed on Saturday a second credit rating upgrade by S&P this year tying it to the success of the country’s economic program and the rebalancing of the economy.
“Türkiye is the only country whose credit rating has been upgraded this year by two notches by three major credit rating agencies,” Treasury and Finance Minister Mehmet Şimşek said in a social media post.
Noting that the U.S.-based S&P upgraded the country’s rating from “B+” to “BB-“, he said on X that the rating upgrade was driven by the rebalancing of the economy, the declining current account deficit and external financing need, the stability of the Turkish lira, strengthening reserves and the disinflation process.
S&P Global raised Türkiye’s long-term sovereign credit ratings by one notch to “BB-” on Friday in its second upgrade this year, citing reserve accumulation and disinflation due to the tight monetary stance of the Turkish central bank.
It also adjusted the outlook to “stable” from a previous “positive,” according to a statement.
“The Central Bank of the Republic of Turkiye’s (CBRT’s) tight monetary stance has enabled Turkish authorities to stabilize the lira, bring down inflation, rebuild reserves and de-dollarize the financial system,” S&P said.
In September, Türkiye’s annual inflation fell to 49.38%, standing below the central bank’s policy rate for the first time since 2021. The expectation is for the trend to continue with fresh data on October inflation due on Monday.
The Turkish central bank lifted its rates from 8.5% in June last year to 50% this March in a bid to curb inflation, while keeping the policy on hold since.
The central bank sees inflation falling to 38% at the end of this year and 14% in the following year, while the government anticipates end-2024 and end-2025 inflation of 41.5% and 17.5%, respectively.
Friday’s move by S&P follows an upgrade in May when the agency highlighted improved coordination between monetary, fiscal and income policies aimed at economic rebalancing.
“These positive developments achieved through the country’s economic program have also lowered the country’s risk premium and led to a significant improvement in external borrowing costs,” Şimşek said.
“Our market indicators, which imply a higher rating, indicate that positive developments will continue in the coming period,” he added.
Upgrades
In September, international credit rating agency Fitch Ratings also upgraded Türkiye’s credit rating from “B+” to “BB-” and changed its rating outlook to stable.
Earlier in the year, in March, Fitch made its first adjustment, upgrading Türkiye from “B” to “B+,” crediting the upgrade to the resilience and effectiveness of economic policy changes introduced in June 2023.
In July, Moody’s upgraded Türkiye’s long-term foreign- and domestic-currency issuer and foreign-currency senior unsecured ratings by two notches, to “B1” from “B3.”
Meanwhile, S&P said that the “stable” outlook reflects “balanced risks over the next 12 months to authorities’ ambitious plans to bring down still elevated inflation, manage workers’ wage expectations and rebalance the Turkish economy.”
Discussions for an increase of the minimum wage for the next year have been high on the agenda in Türkiye in the recent period, while the International Monetary Fund (IMF) also suggested recently to authorities to avoid a repeat of a bumper hike in terms of anchoring inflation.
‘Good news’
Evaluating the upgrade while speaking to Anadolu Agency (AA), Frank Gill, sovereign ratings senior director at S&P Global Ratings, said on Sunday this was “a very high rating increase for a single year.”
“Admittedly, we started from a very low rating for a middle-income economy as diverse, open and resilient as Türkiye, but a two-notch rating increase this year is good news.”
Noting that the main factor behind the rating increase decision was the increase in international reserves, Gill said that this was an indication that the transition to orthodox monetary policy had been going well so far.
Furthermore, Gill stated that the policy rate hike to 50% by the CBRT had begun to show its effect, adding: “The economy is rebalancing. The 12-month current account deficit is around 1% of GDP (gross domestic product) as of August.”
Gill also pointed out that the driving force in the rebalancing of the economy was the households switching from foreign currency to Turkish lira in their deposit base, and that this situation greatly contributed to the central bank’s accumulation of foreign exchange reserves. “Currently, the need for net external financing has decreased significantly,” he said.
Recalling that the credit rating outlook was determined as stable, Gill said that the rationale behind this is that going forward, the implementation of the next phase of the disinflation and rebalancing program will probably be “a little more challenging.”
He also drew attention to services inflation, saying it has declined but is still well above headline inflation in Türkiye, and it remains sticky as in many countries, noting this could be one of the difficulties.
Minimum wage expectations
Referring to expectations on the minimum wage increase, Gill said, “We are monitoring whether decisions regarding income policy will be closely coordinated with next year’s inflation target within the scope of the medium-term program.”
“If the minimum wage increase is more in line with past inflation, there may be questions about how quickly they can reduce headline inflation,” he noted.
“Our expectation is that the minimum wage will probably be increased to an average between the inflation target and last year’s and this year’s end inflation.”
“We are projecting inflation to be around 44% at the end of this year. In other words, the average of 44% and the target of 17% is around 30%,” said the S&P official.
Moreover, he also conveyed their expectations that the first rate cut by the CBRT could occur at the end of the first quarter of 2025.
Gill, who also said that they predict the Turkish economy will grow by 3.1% this year, noted that growth would slow to 2.3% next year.
“Considering population growth and the expected recovery in demand in Türkiye’s key European trading partners, negative growth would be very unusual,” he said.
“However, we cannot ignore the possibility of growth below 2%. If inflation does not fall, the CBRT will need to maintain an even tighter policy stance.”
On a more positive note, Gill said that Türkiye is an open economy where services exports “are doing really well.”
“We think net exports will contribute to growth over the next two years.”
