Fitch Ratings on Tuesday cited a return to more conventional economic policymaking since the May election as the primary driver behind its decision to upgrade Türkiye’s credit rating outlook last week.
The credit rating agency revised the outlook on the nation’s long-term foreign-currency issuer default rating to "stable" from "negative." It affirmed its debt grade at "B," five notches below investment grade.
In its assessment released Friday, the agency said the revision reflected the return to a more conventional and consistent policy mix that reduces near-term macro-financial stability risks and eases balance of payments pressures, according to Erich Arispe Morales, a senior director in Fitch Ratings’ sovereigns group.
In an interview with Anadolu Agency (AA), Morales shared insights into Türkiye’s economic outlook, highlighting several key factors that have led to a more positive assessment.
He also discussed the country’s growth prospects and weighed in on the possibility of an upgrade to "investment grade."
Morales explained that the country has moved away from targeted financial regulations that were perceived as "interventionist and unpredictable."
"This refers to reducing the monetary policy rate as the main mechanism to signal the central bank’s policy direction. We have also seen that policy is more consistent than before and we have a very mixed policy focused on growth and employment," he said.
This shift toward more consistent and growth-focused policies despite previous macroeconomic imbalances has helped stabilize the country’s economic outlook, he added.
"We can point out also that we have seen some reduction in uncertainty after the elections, given now that the policy direction is clear," he said.
The change of policy direction since the May election, though, has seen President Recep Tayyip Erdoğan bring in two former Wall Street bankers to run the economy.
Treasury and Finance Minister Mehmet Şimşek and Central Bank of the Republic of Türkiye (CBRT) Governor Hafize Gaye Erkan have shifted away from ultra-loose monetary policy and have dramatically raised interest rates in a bid to tackle the country’s long-term inflation problem.
Under Erkan, the central bank has roughly tripled its benchmark policy rate to 25% and pledged that monetary tightening will gradually be strengthened as needed.
Upgrade to investment grade?
Regarding Türkiye’s economic growth, Morales acknowledged that the second quarter of the year saw greater policy stimulus due to the general elections.
Looking ahead, Fitch Ratings predicts a growth rate of around 4.3% for this year.
He said, however, that if policy consistency and tighter fiscal measures continue, growth could slow to 3% next year before recovering to approximately 3.4% in 2025.
While acknowledging that credit pressures have eased due to recent policy shifts, Morales emphasized that macroeconomic and external financial challenges persist.
Türkiye currently faces inflation of 59% as well as challenges related to an exploitative foreign exchange-protected Turkish lira deposit scheme, he said.
Morales pointed out that achieving "investment grade" status for a country is a long-term effort and requires sustained policy improvements over time.
This effort not only boosts economic resilience but also enhances predictability for investors and benefits economic actors in Türkiye, he added.
Morales also commented on recent announcements, including funding from Gulf countries and the World Bank’s decision to double investments in Türkiye.
He highlighted the importance of access to financing, especially concerning the country’s current account deficit.
The three-year commitment of bilateral and official financing represents a positive development for Türkiye, providing a stable source of funding for external accounts, he underlined.
Risks and opportunities
In terms of opportunities, Morales noted that Türkiye currently enjoys a degree of credibility among investors due to recent policy adjustments.
Despite past reversals, the government’s efforts to address macroeconomic imbalances and provide stability have garnered investor confidence, he underscored.
However, geopolitical risks, exposure to trade shocks, and global economic patterns remain concerns for the nation.
The key near-term risk, according to Morales, is policy predictability, especially with local elections on the horizon in March 2024, where additional stimulus measures could be deployed.