Fitch credits Türkiye's policy shift for outlook upgrade

Fitch Ratings attributed its recent upgrade of Türkiye's credit rating outlook to a shift towards more conventional economic policymaking following the May election. The agency revised the nation's long-term foreign-currency issuer default rating outlook from "negative" to "stable," while maintaining its "B" debt grade, which is five notches below investment grade.

In their assessment released on Friday, Fitch Ratings highlighted the return to a more consistent and conventional policy approach, which has reduced near-term macro-financial stability risks and eased balance of payments pressures. Erich Arispe Morales, a senior director at Fitch Ratings, emphasized this positive shift in policy, which has contributed to a stabilized economic outlook.

Morales explained that Türkiye has moved away from previously perceived "interventionist and unpredictable" financial regulations. This shift includes reducing the reliance on the monetary policy rate as the primary signaling mechanism for the central bank's policy direction. The new policy approach is characterized by greater consistency and a balanced focus on growth and employment.

The clarity in policy direction following the elections has reduced uncertainty. President Recep Tayyip Erdoğan's appointment of two former Wall Street bankers, Treasury and Finance Minister Mehmet Şimşek and Central Bank of the Republic of Türkiye (CBRT) Governor Hafize Gaye Erkan, signaled a move away from ultra-loose monetary policy. The central bank, under Erkan's leadership, has significantly raised interest rates to address long-term inflation concerns.

Regarding Türkiye's economic growth, Fitch Ratings anticipates a growth rate of approximately 4.3% for this year. However, if policy consistency and tighter fiscal measures continue, growth could slow to 3% next year before gradually recovering to around 3.4% in 2025. While credit pressures have eased due to recent policy shifts, macroeconomic and external financial challenges remain, including high inflation and issues related to a foreign exchange-protected Turkish lira deposit scheme.

Morales stressed that achieving "investment grade" status for a country is a long-term endeavor that necessitates sustained policy improvements over time. This effort enhances economic resilience, boosts predictability for investors, and benefits Türkiye's economic actors.

He also highlighted recent announcements, such as funding from Gulf countries and the World Bank's decision to double investments in Türkiye. Access to financing, particularly regarding the country's current account deficit, is crucial. The commitment of bilateral and official financing over a three-year period is seen as a positive development, providing a stable source of funding for external accounts.

While Türkiye enjoys credibility among investors due to recent policy adjustments, geopolitical risks, exposure to trade shocks, and global economic patterns remain concerns. The key near-term risk identified by Morales is policy predictability, especially with local elections scheduled for March 2024, where additional stimulus measures could be implemented.

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