Last Updated on March 17, 2024 by Aydoğan Aknar
Turkey’s Economic Fortunes Brighten: Fitch Ratings has upgraded Turkey on Tighter Monetary Policies
In a significant turn of events, Fitch Ratings has upgraded Turkey long-term foreign currency issuer default rating from “B” to “B+.” This upward revision comes as a result of the country’s proactive stance on monetary policy, aimed at reining in inflationary pressures.
Fitch’s decision underscores the growing confidence in Turkey’s economic trajectory, particularly since the pivotal shift in policy direction initiated back in June 2023. The agency has not only upgraded the rating but also revised the country’s outlook from “stable” to “positive,” signaling optimism about future prospects.
Factors Affecting the Upgrade
One of the key drivers behind this upgrade is the notable easing of inflation expectations coupled with a decrease in external liquidity risks. This positive trend reflects a more conducive environment for external financing, bolstered by higher reserves, reduced forex-protected deposits, and a narrowing current account deficit.
Turkey’s central bank has played a pivotal role in this process, implementing stringent monetary measures, including substantial interest rate hikes amounting to 3,650 basis points since June 2023. Additionally, the bank has actively managed excess liquidity through various mechanisms such as reserve requirements, deposit auctions, and targeted credit policies.
While inflation saw a spike, reaching an annual rate of 67 percent in February, Fitch remains optimistic about the outlook. The agency forecasts inflation to average at 58 percent for 2024, with a projected decline to 40 percent by the year-end, albeit still above the central bank’s intermediate target of 36 per cent.
Turkish Finance Minister Mehmet Simsek attributes this rating upgrade to the government’s robust economic program and its commitment to rule-based, predictable policies. He expressed confidence that continued efforts towards macro-financial stability, along with a focus on disinflation, narrowing current account deficit, and budget discipline, will further enhance Turkey’s credit rating in the coming months.
FAQ’s
- Why did Fitch upgrade Turkey’s rating?
Fitch upgraded Turkey’s rating due to the country’s implementation of tighter monetary policies, aimed at controlling inflation. This move reflects increased confidence in the effectiveness of the policies adopted since June 2023.
- What are the key factors driving Turkey’s improved rating outlook?
Turkey’s improved rating outlook is driven by several factors, including easing inflation expectations, moderated external liquidity risks, favorable external financing conditions, higher reserves, reduced forex-protected deposits, and a narrowing current account deficit.
- How has Turkey’s central bank contributed to the rating upgrade?
Turkey’s central bank has played a significant role by tightening monetary conditions through substantial interest rate hikes and managing excess liquidity through reserve requirements, deposit auctions, and targeted credit policies. These measures have helped in stabilizing the economy and reducing inflationary pressures.
- What is the inflation outlook for Turkey according to Fitch?
Fitch forecasts inflation to average at 58 percent for 2024, with a projected decline to 40 percent by the year-end. However, it remains above the central bank’s intermediate target of 36 percent. Despite this, Fitch maintains optimism about Turkey’s economic prospects.
- How does the Turkish government view the rating upgrade?
Turkish Finance Minister Mehmet Simsek attributes the rating upgrade to the government’s robust economic program and its commitment to rule-based, predictable policies. He expresses confidence that continued efforts towards macrofinancial stability, disinflation, narrowing current account deficit, and budget discipline will further enhance Turkey’s credit rating.
