Fitch’s Year-End Inflation Forecast for Turkey

In a report published today, Fitch expects the operational performance of Turkey’s local administrations to remain resilient against the macroeconomic environment. However, due to tighter monetary policy, Fitch anticipates inflation to slow down in the second half and reach 40% by the end of the year.

Fitch Ratings noted that the operational performance of local and regional governments (LRGs) in Turkey is expected to withstand the challenging macroeconomic environment, supported by economic growth bolstering tax revenues. However, Fitch also highlighted that expected monetary tightening after the March 2024 local elections would cause real GDP growth to fall to 2.8% in 2024 and remain around 3% in 2025, leading to a slowdown in the operational performance of LRGs.

In its report published today, Fitch made the following assessments:

– The high inflation rate of 69.8% in April 2024 (64.8% in 2023) will continue to put pressure on the operating expenses of LRGs in Turkey, alongside the expected depreciation of the lira and the increase in the minimum wage in January 2024.

– Due to tighter monetary policy, Fitch expects inflation to slow down in the second half of 2024 and reach 40% by year-end. The negative effects of inflation are expected to be partially offset by increased tax revenues and transfers from the central government, which constitute approximately 65% and 17% of LRGs’ operating revenues, respectively. Consequently, the operating balance is expected to average 29% by 2027, down from 39% in 2023.

– Ahead of the local elections, metropolitan municipalities are expected to reduce planned investments in the medium term, which will help reduce expenditure volatility. However, high domestic interest rates and short-term lira maturities will further complicate borrowing needs to partially finance infrastructure investments, with new borrowing costs rising from 25% in 2023 to over 50% in 2024.

– The anticipated depreciation of the Turkish lira (USD/TRY 38 by the end of 2024) will negatively impact LRGs’ debts, as more than 60% of their borrowings are unhedged foreign currency-denominated. Nevertheless, according to our rating scenario for 2023-2027, the forecasted resilient operational performance provides enough cushion to withstand future currency depreciation, which is expected to keep ratings stable.