Erich Arispe Morales, Senior Director and Turkey Analyst at the international credit rating agency Fitch Ratings, answered questions regarding the agency’s decision to raise Turkey’s credit rating from “B+” to “BB-” with a stable outlook last Friday.
Morales stated that the country’s rating outlook has started to improve following political changes after the last general elections in Turkey and emphasized that the current economic program continues to receive support from political leadership.
He indicated that as vulnerabilities in the Turkish economy begin to improve, there is an increase in the credit rating, mentioning that international reserves have risen and that there has been an improvement in the composition and level of international reserves this year.
In addition to the improvement in international reserves, Morales highlighted the decrease in currency-protected deposits and dollarization, saying, “Our confidence has increased that the government and economic authorities will continue to maintain a tight monetary policy. We believe that the budget deficit, which is close to 5% of the gross domestic product (GDP) this year, will consolidate to around 3% next year. Moreover, we anticipate that revenue policies will align more closely with the Turkish Republic Central Bank’s (CBRT) process of reducing inflation. This is a crucial point because the biggest challenge ahead for Turkey continues to be inflation. If inflation does not approach the levels seen before the monetary policy easing in 2021, it will continue to pose vulnerabilities for Turkey.”
“THE ECONOMY WILL CONTINUE TO BALANCE WITH A NET EXPORT-SUPPORTED GROWTH MODEL BY 2025”
Morales further emphasized that they expect inflation in Turkey to decrease to 43% by the end of this year and to 21% by the end of next year.
He stressed that monthly inflation pressures are slowing down, stating, “As monthly inflation pressures ease, market inflation expectations will adjust accordingly. However, we predict that the decline in inflation expectations among households and firms will be slower. The reduction of these expectations is extremely important but will take some time.”
Morales explained, “Given that we expect inflation to decrease to 21% by the end of 2025, this will necessitate a gradual easing in monetary policy. Inflation expectations will improve, but for these expectations to remain aligned, sustainably decrease, and continue the reduction in dollarization, monetary policy will need to remain tight. In this regard, we anticipate that a gradual easing in monetary policy will begin in the first quarter of 2025.”
He noted that they forecast a relatively low growth rate of 3.5% for this year and 2.8% for 2025, indicating that this level of growth supports the rebalancing process in inflation expectations.
Morales stated that the government is striving to achieve balanced growth supported by domestic demand and external factors, saying, “This growth also needs to be supported by a predictable and reliable policy framework. From our perspective, we expect to see a lower growth period as part of this adjustment. In this context, 2025 will continue to be a period in which the economy is rebalancing towards a net export-supported growth model from a domestic demand and consumption-focused model, and inflation will remain high. This is part of the rebalancing process.”
“FISCAL POLICY WILL CONTRIBUTE TO THE DECLINE IN INFLATION BY 2025”
Morales also evaluated the impact of fiscal policy on the disinflation process, continuing, “When we observed the policy change in June 2023, fiscal policy intervened to reduce the budget deficit through tax measures, but successfully brought the fiscal deficit below projections for 2023. We believe that this year, fiscal policy has not been able to contribute significantly to the tightening of monetary policy. We attribute the resilience of domestic demand seen in the first half of the year to minimum wage increases and fiscal policy.”
Considering the recent measures taken by the government under fiscal policy, he predicted that a fiscal consolidation of around 2% next year would contribute to the disinflation process. “We expect improved fiscal policy coherence to be present in 2025, and this is our key point.”
Morales added that domestic and foreign investors may want to see more evidence that the current policy stance will continue and that the risks of policy reversal are decreasing, noting that the re-anchoring of inflation expectations and the establishment of the credibility of monetary policy will take time.
In Fitch’s announcement on Friday, it was stated that positive real interest rates, a low current account deficit, and the gradual reduction in currency-protected deposits will likely support the sustainability of improvements in external buffers. It was projected that reserves would rise to $158 billion by the end of this year and to $165 billion by the end of 2025.
Fitch Ratings had maintained Turkey’s credit rating at “B” in September of last year but changed the outlook from “negative” to “stable” after two years. In March of this year, it raised the country’s credit rating from “B” to “B+” and upgraded the outlook from “stable” to “positive.”
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Arwen Volkov, A graduate of the University of St. Gallen in Switzerland with a degree in International Finance, Arwen specializes in sustainable finance and green investments. She began her career at an investment bank in London, where she developed financing models for environmentally friendly projects. Known for her analytical and strategic thinking skills, Arwen is a sought-after financial consultant. In her spare time, she mentors fintech startups, contributing to their growth strategies. She is also a nature enthusiast and an amateur photographer.
