Fitch Ratings said on Tuesday Türkiye's economy has remained resilient despite heightened geopolitical uncertainty, with sustained improvements in international reserves remaining a key factor for any future sovereign credit rating upgrade.

The comments from Erich Arispe Morales, senior director at Fitch Ratings, came after the agency last Friday affirmed Türkiye's long-term foreign currency sovereign rating at "BB-" with a stable outlook.

Morales said Fitch's latest assessment was consistent with an unscheduled review published in April amid the U.S.-Israeli war on Iran, which prompted the agency to reassess risks facing the Turkish economy.

Supply shocks mainly due to the fallout from the Iran war had pushed Türkiye's headline inflation higher in April and May, but June signaled the return of a downward trend.

While Türkiye's international reserves declined during the conflict, they have since partially recovered, though they remain below pre-war levels.

"International reserves have recovered, but they are still below their pre-war levels. We have also seen inflationary pressures ease somewhat,” Morales told Anadolu Agency (AA), according to the Turkish transcript of his remarks.

"However, geopolitical uncertainty remains elevated, and this could have implications not only for Türkiye but for other emerging markets through inflation and external balances," he added.

Morales said the conflict continued to create significant political uncertainty across the region but noted that Türkiye's policy framework had helped preserve gains in inflation expectations despite higher uncertainty and weaker reserves.

Morales also pointed to stable domestic confidence in the Turkish lira, saying positive dollarization remained broadly steady at around 38%.

"The message from the central bank and the economic authorities is that they remain committed to the program aimed at bringing inflation down sustainably. That is the important point," he said.

"Despite ongoing global uncertainty, we think the Turkish economy is relatively resilient. Over the longer term, Türkiye has demonstrated resilience to macroeconomic imbalances compared with many other economies."

Reserves remain key to rating outlook

Morales said inflation remained high but continued to show signs of easing, adding that bringing it down from above 30% would take time and require sustained policy credibility.

Annual inflation eased to 32.1% last month from 32.6% in May. The decline had stalled following a sharp rise in energy prices caused by the war launched by the U.S. and Israel against Iran on Feb. 28.

On a monthly basis, consumer prices rose 0.99% in June, slowing from 1.7% in May.

The Central Bank of the Republic of Türkiye (CBRT) raised its end-2026 inflation forecast to 24% from 16% in its quarterly inflation report published in mid-May, saying the short-term inflationary effects of the Iran war would remain "pronounced."

The bank projects inflation falling to 15% at the end of 2027 and 9% at the end of 2028.

Morales said Türkiye's healthy banking sector, continued access to external financing and sufficiently high real interest rates had supported demand for lira-denominated assets and helped limit dollarization.

"Access to financing resulting from policy adjustments and the strength of the banking sector are among the factors that provide Türkiye with resilience against external shocks," he said.

Morales said Fitch would continue to closely monitor Türkiye's international reserves, describing durable reserve accumulation as a critical condition for a potential sovereign rating upgrade.

"Given Türkiye's relatively high external financing needs, it is very important that improvements in reserves prove to be lasting," he said. "We expect Türkiye's reserves to be somewhat higher by the end of the year than current levels, but the sustainability of this improvement will be the decisive factor."

He added that maintaining tight macroeconomic policies capable of delivering a sustained decline in inflation and reducing balance-of-payments risks would also be necessary to support a future upgrade.

"I think this is essential for maintaining confidence in an environment where external shocks and political uncertainties may arise," he noted.

Commenting on monetary policy, Morales said Türkiye's central bank had sought to provide markets with a clear framework for assessing risks, which he described as important for policy predictability.

He said Fitch expects the central bank to begin easing monetary policy later this year, assuming geopolitical risks recede and energy prices moderate.

"Our forecast is that the central bank will cut its policy rate by a total of 200 basis points, bringing it to 35% by the end of 2026," Morales said.

Last month, the CBRT held its one-week repo rate steady for a third consecutive meeting as it monitored ‌the impact of the Iran war.

Since the conflict started, the bank has halted an easing cycle that began in late 2024 and taken other liquidity steps that pushed the lira overnight rate up to the ⁠40% limit.