Fitch Ratings: Financing conditions are improving in Turkiye

By News Centre

Turkiye's new economic policy received full marks from the international credit rating agency Fitch Ratings, which recently raised Turkey's credit rating. The agency stated that the policy change not only reduces the macroeconomic financial stability risk in Turkiye but also provides an improvement in external financing conditions.

Fitch Ratings' Senior Director and Turkiye Analyst Erich Arispe Morales said that they have increased confidence that Turkiye's current economic policy axis is more durable and that the policies will be sustained.

Erich Arispe Morales answered the questions of an AA reporter after Fitch Ratings increased Turkiye's credit rating from 'B' to 'B+' and its rating outlook from "stable" to "positive" last week.

Stating that Fitch Ratings confirmed Turkiye's credit rating as 'B' in September last year and increased the rating outlook from "negative" to "stable", Morales said, "This decision is consistent with the change in Turkiye's economic policies in reducing the risk of macroeconomic and financial instability."

Morales noted that the consistency in Turkiye's macroeconomic policies has yielded some important results, and that the first of these is seen in the change in external financing conditions.

He explained that the market was not only opened to the public, but also banks and companies had access to external financing after the policy change. Morales emphasized that there were pleasing developments for the Turkish economy, including the decline in Turkiye's 5-year credit risk premium.

"We also believe that current policies are consistent in reducing Turkiye's current account deficit. In May 2023, the current account deficit, which was at the level of 60 billion dollars on a 12-month basis, started to decrease and closed the year at the level of 45 billion dollars. Looking forward, the current account deficit in the country will be reduced in 2024. We expect it to fall to approximately 2.6 percent of Gross Domestic Product (GDP) and to 2.2 percent in 2025. This rate is below the projected average for other countries with similar ratings to Turkiye," Morales said.

Pointing out that there has been an improvement in Turkiye's international reserve levels, Morales said, "As we foresee in our base scenario, if Turkiye's economic policies are continued in this way, we will see further improvement at this point (in international reserves). If the policies are maintained, the international reserve coverage will increase to 4.5 months in 2025. We foresee this. This means that Turkiye's reserve coverage ratio will exceed the level predicted for countries in the B grade category."

Morales pointed out that there have been important developments regarding exchange rate protected deposits and said that the first of these was the decrease in the size of exchange rate protected deposits, which was 130 billion dollars at the end of August 2023, to 74 billion dollars. He emphasised that it is very important that this decrease occur without causing a significant increase in financial dollarization.

"It is important not only to reduce the contingent liability, but also to ensure that the gradual elimination of this mechanism does not lead to an increase in financial dollarization. Considering all these developments, we can say that our confidence that the policy change will be sustained 6 months after our evaluation in September has increased. The developments regarding reducing foreign currency protected deposits, reducing the current account deficit and easing inflation expectations without increasing dollarization confirm our assessment that we announced on Friday last week," , Morales said.

Erich Arispe Morales pointed out that various factors, such as "developments in the global economy, growth expectations, monetary policy and political developments" are effective in foreign investors' decisions about Turkiye.

"There is a development that we noticed that the policy change not only reduced the macroeconomic financial stability risk in Turkiye, but it has also resulted in an improvement in external financing conditions, which is very important. In this context, assessments of the reliability, durability, and consistency of the policy framework have played and will continue to play an important role in foreign investor expectations," he said.

Morales pointed out that although inflation is expected to decline significantly in the next few years, it remains the main policy challenge for the Turkish economy.

"The inflation we saw in the first two months of this year reflected some policy measures implemented since the end of last year. One of these was the 49 percent increase in the minimum wage at the beginning of the year. This gave some impetus to domestic demand and household consumption. In addition, public expenditures were reduced. We saw that credit card usage increased. We are aware that these factors led to increased inflationary pressures in the first two months of the year,"

Morales, however, stated that fiscal money, credit, and income policies are consistent with the effort to reduce inflation and that they maintain their expectations that the CBRT will have a monthly inflation path approaching the level predicted by the end of this year.

On the other hand, he said that Fitch Ratings' inflation expectation is at 40 percent, despite the CBRT's 36 percent inflation projection.

"We expect inflation to be at an average of 58 percent this year and decrease to 29 percent. However, inflation is only for this year and the future. It continues to be a fundamental policy issue for Turkiye, not for the next year, but in the medium term," he said.

Morales emphasised that indicators of steady progress in Turkiye's fight against inflation and increasing confidence that the rebalancing process will lead to a sustainable decline in inflation are among the factors that will increase the rating.