S&P upgrades Turkey's credit outlook on rebalanced economic strategy

Ankara is expected to take measures to streamline fiscal, monetary and incomes policies in 2024

Turkish lira banknotes at a currency exchange office in Ankara. The Turkish lira is also among the worst performers among emerging market currencies and is down nearly 9.5 per cent so far in 2024. ReutersShow less

S&P Global Ratings has upgraded Turkey's credit rating outlook, citing the government's strategy of taking a more rebalanced approach that is expected to generate confidence in its economy.

The country's long-term rating was raised one notch up to “B+” from “B”, with a positive outlook, the New York-based ratings agency said on Friday.

A “B+” rating, which is “highly speculative”, is four levels below investment grade, according to S&P's ratings scale. Non-investment grade makes it more difficult for a country to access capital markets and raise funding that it needs when it wants to borrow.

S&P expects Ankara will take measures to streamline fiscal, monetary and incomes policies, which would include cuts to current non-wage expenditures in 2024.

Also, in the aftermath of the devastating earthquake that hit Turkey and neighbouring Syria, any spending related to the natural disaster may take longer to execute, it said.

“Details of a larger, more-detailed fiscal and incomes policy plan are limited. We believe the emphasis will be on gradual changes, rather than a front-loaded economic programme,” S&P said.

“Nevertheless, we think that the economy is already rebalancing, with net exports already adding to rather than subtracting from growth and that credit conditions are tight. We also believe a stable nominal exchange rate will promote the de-dollarisation of private and public balance sheets.”

S&P's decision follows local elections in Turkey, in which President Recep Tayyip Erdogan's party suffered a surprise and heavy defeat.

A return to a more orthodox policy has led S&P to “believe the co-ordination between monetary, fiscal, and incomes policy is set to improve, amid external rebalancing”.

“We forecast rising portfolio inflows and narrowing current account deficits over the next two years, alongside declining inflation and dollarisation, although progress will be slow and reserve accumulation modest as the central bank limits depreciation of the Turkish lira,” S&P said.

In an alternative scenario of a harder economic landing, “fiscal outcomes would be worse and balance-of-payments trends would be better”, it added.

Turkey is facing chronic inflation following years of Mr Erdogan's unorthodox policies. He installed a new economic team to stabilise the economy and control consumer prices last year.

The country's central bank said in December that it expects inflation to rise to as high as 75 per cent in May, before dipping to about 36 per cent by the end of this year.

The Turkish lira is also among the worst performers among emerging market currencies tracked by Bloomberg. It is down nearly 9.5 per cent so far in 2024.

On March 21, Turkey’s central bank delivered a surprise interest rate rise, increasing its benchmark rate to 50 per cent from 45 per cent, tightening the monetary policy further as the regulator fights to curb inflation that rose to 70 per cent in last year.

S&P expects the Turkey's central bank to keep its benchmark rate at 50 per cent for the rest of 2024 and be vigilant against depreciation pressures on lira as a means of tempering demand and minimising the effects of the exchange rate into inflation.

Political stability would also be a factor; with no scheduled national elections until 2028, the country's policymakers “have space to implement policies to compress demand and inflation, using all available wage-setting, fiscal and monetary tools”, it said.

“Whether and how quickly authorities tackle the inflation problem will affect economic stability, public finances and hence our sovereign rating on Turkey. Public-sector wages and pensions remain indexed to past inflation, which will make it much tougher to tame inflation quickly.”

Turkey has also stopped all trade with Israel until the latter allows humanitarian aid to flow uninterrupted into Gaza.

The decision expands on a move announced in April to restrict some Turkish exports to Israel due to the “worsening humanitarian tragedy in Palestine”, Turkey's Trade Ministry said on Thursday.