S&P Global Ratings does not expect the ongoing investigation and liquidation of over 100 investment funds in Türkiye to put downward pressure on the country's sovereign credit rating, according to its analysts.

S&P is due to publish its second credit rating and outlook review for Türkiye this year on Oct. 16. In its latest assessment in April, the agency affirmed Türkiye's rating at BB-/B and maintained its outlook as stable.

Turkish authorities have stepped in to resolve the fund turmoil that erupted last month after suspected price manipulation in a number ⁠of thinly traded stocks triggered heavy losses and redemption pressures at investment funds.

Almost half a million investors hold stakes in ⁠more than 100 investment funds with combined assets of nearly $20 billion that authorities ordered to be liquidated in mid-September.

Karen Vartapetov, S&P Global Ratings' director and lead analyst for Central and Eastern Europe (CEE) and the Commonwealth of Independent States (CIS), said the regulatory measures and policy response to the fund investigation had been "quick and convincing," adding that authorities had managed to contain the issue without a broader negative impact on the financial system.

"There is not much evidence that this process has negatively affected confidence and perceptions of the Turkish economy," Vartapetov told Anadolu Agency (AA), according to a Turkish transcript of his remarks.

From a macroeconomic perspective, there has so far been limited impact, with the issue appearing to remain largely isolated, he said.

S&P had not observed significant reactions in areas it monitors, including the exchange rate, dollarization, financial conditions and banking-sector liquidity, according to Vartapetov.

If the fund-related developments remain isolated, they would not create downward pressure on the sovereign rating, he said.

"I think the negative effects will be limited if the fund crisis remains isolated and households continue to have confidence in real-currency assets," Vartapetov said.

He stressed that sovereign ratings are determined by a committee and that the developments involving the funds would inevitably be discussed as part of that process.

S&P would likely highlight the episode as a risk, Vartapetov said, but added that there was not yet clear evidence of significant macroeconomic consequences.

If the issue remains confined to "a narrow asset class," it would not be a "game changer" for investor sentiment, he said.

Reserve recovery supports rating

Vartapetov also discussed S&P's outlook for Türkiye's growth, inflation and international reserves.

The agency expects average inflation of around 30% this year and economic growth of close to 3%, he said. Inflation lastly eased to 31.51% in August.

Reserve adequacy remains one of the most important parameters for Türkiye's credit rating, Vartapetov said.

Türkiye entered the year with reserves at a very high level, including record gross reserves. The Central Bank of the Republic of Türkiye (CBRT) used some reserves to contain the negative impact of higher energy prices, but later replenished part of the amount, he said.

"Gross reserves are therefore somewhat below January-February levels, but the recovery in reserves is supportive of the credit rating," Vartapetov said.

Net reserves are not as strong as gross reserves but have also recovered, he added.

Vartapetov said household behavior had been another key focus for S&P in assessing Türkiye's credit profile in recent years.

The agency has been monitoring whether households continue to prefer the Turkish lira, lira-denominated assets and bank deposits or shift toward the dollar, which could put pressure on foreign-exchange reserves.

Despite geopolitical developments in the Middle East, high energy prices and the fund investigation, households' stance toward the lira has remained relatively strong, Vartapetov said.

"We have not seen much evidence of dollarization picking up again. Financial-system dollarization has not increased," he said.

Policy response seen as ‘quite strong’

Regina Argenio, director of financial institutions ratings in the region at S&P Global, said the biggest immediate impact of the fund developments had been felt in the stock market, where equity valuations declined.

"Beyond the initial correction, however, we have seen valuations stabilize," she said. Data arrive with some delay and may not yet provide the full picture, but there had also been no major movement in bank liquidity, she added.

Argenio said it was important that the problems remained isolated to the funds concerned and described the policy response so far as "quite strong."

Beyond judicial proceedings, authorities had provided liquidity to the market and appointed banks to handle the liquidation of the funds, she added.