Fitch upgrades Turkey’s credit rating on stronger fiscal policies

The country's economy is forecast to grow 2.8 per cent in 2024

Kadikoy district in Istanbul. The Turkish central bank held its main interest rate at 45 per cent last month, pausing after eight increases in a row designed to slow consumer prices. AFP

Fitch Ratings has upgraded Turkey’s credit rating on stronger fiscal policies and reduced financial risks.

Turkey’s ratings have been increased one notch to B+ from B with a positive outlook, the agency said on Friday.

“The upgrade reflects increased confidence in the durability and effectiveness of policies implemented since the pivot in June 2023, including greater-than-expected front-loading of monetary policy tightening, in reducing macroeconomic and external vulnerabilities,” Fitch said.

“Inflation expectations have eased and external liquidity risks have moderated, reflected by more favourable external financing conditions, higher reserves and a narrowing current account deficit.”

Last month, Turkey named the central bank’s deputy governor Fatih Karahan as its head following the resignation of Hafize Gaye Erkan, signalling a continuation of the transition to more investor-friendly, orthodox economic policies that Ms Erkan put in place.

Under Ms Erkan, the central bank abandoned an ultra-low interest rates policy that President Recep Tayyip Erdogan had advocated for years and focused on increasing interest rates to address rising inflation.

“The central bank has tightened monetary conditions through a combination of larger-than-expected interest rate hikes to 45 per cent, absorption of excess liquidity through reserve requirements and deposit auctions, and targeted credit policies,” the rating agency said.

As a result, inflation expectations have eased, and “overall credit growth has slowed, but it remains high for household loans,” it added.

Fitch expects inflation to average 58 per cent in 2024 and finish the year at 40 per cent, above the central bank's intermediate target of 36 per cent. Inflation is forecast to fall further to 29 per cent in 2025 amid continued tightening of the monetary policy.

International reserves stood at $131 billion at the beginning of March, $32 billion higher than June 2023, according to the agency.

Turkey’s current account deficit is forecast to fall to 2.6 per cent of GDP in 2024, from 4.2 per cent of GDP in 2023 and further to 2.2 per cent of GDP in 2025 as growth in tourism receipts continues, and tight monetary policy and trade growth with its main partners are maintained.

Turkey is strengthening its trade ties. Its non-oil trade with the UAE grew by 103.7 per cent year-on-year in 2023, the highest among the top 10 trading partners after the two countries in September put their Comprehensive Economic Partnership Agreement into effect.

It is also strengthening its ties with Saudi Arabia, the Arab world’s largest economy.

“Growth was resilient at 4.5 per cent in 2023, but we expect that a tighter policy mix weighing more forcefully on domestic demand and private consumption after the first quarter of 2024, combined with relatively weak external demand, will result in growth slowing to 2.8 per cent in 2024,” Fitch said.

Growth could then pick up to 3.1 per cent in 2025 on improved growth prospects for Turkey's main trading partners, according to the agency.

Turkey's economy is forecast to grow 3.1 per cent in 2024 and 3.2 per cent in 2025, the International Monetary Fund said in its January report. Its economy expanded by 4 per cent in 2023.