While upgrading outlook for Turkey, Fitch warns: “High inflation seems to be primary risk”

Fitch Ratings, the international credit rating agency, confirmed Turkey’s credit rating at “B” while upgrading the outlook from “negative” to “stable” for the next 2 years. Fitch emphasized that high inflation remained a fundamental risk for Turkey and issued a warning about the “high level of uncertainty.”

Fitch released its much-anticipated statement the previous night. The agency maintained Turkey’s credit rating at “B,” which is two notches below the investment-grade level. In its statement, Fitch expressed the view that “the revision of the outlook to ‘stable’ reflects a more traditional and consistent policy mix that reduces short-term macro-financial stability risks and eases external payment pressures.”

POLICY RATE EXPECTED TO GO UPTO 35 PERCENT BY END 2023

Fitch predicted that the Central Bank of Turkey (TCMB) would raise its policy rate to 35% by the end of 2023 and suggested that the rate would remain at this level in 2024. Fitch also stated, “There is a high level of uncertainty regarding the future pace and duration of monetary policy tightening.”

Fitch noted a noticeable improvement in gross international reserves since mid-May and projected that reserves would reach $115 billion by the end of 2023. The agency also shared the expectation that reserves would remain “relatively stable” in 2024.

GROWTH MAY DECLINE

Fitch estimated that Turkey’s growth would reach 4.3% in 2023 but cautioned that it could drop to 3% in 2024. Highlighting high inflation as Turkey’s continued primary risk, the agency warned, “There is still uncertainty about the size, durability, and success of policy adjustments aimed at reducing inflation, partially due to political reasons.”

The statement also touched upon factors that could lead to a possible credit rating upgrade, including increased confidence in the sustainability of current policy normalization and rebalancing processes, which could positively impact macroeconomic stability, including a sustained decrease in inflation.

Fitch last confirmed Turkey’s credit rating as “BB-” with a “stable” outlook on August 13, 2021. The credit rating agency had shifted the country’s outlook to negative on December 2, 2021.