Citing risks concerning financial stability, Fitch Ratings has lowered Turkey's credit rating from BB- to B+.
"Policy-driven financial stress episodes of higher frequency and intensity have increased Turkey's vulnerabilities in terms of high inflation, low external liquidity and weak policy credibility," the global rating agency said in a statement on Friday.
"The risk of additional destabilizing monetary policy easing or stimulus policies ahead of the 2023 general elections is high," it added.
Fitch expects Turkey's inflation to reach 38% by the end of 2022, and average 41% in 2022 and 28% in 2023, saying it is the second-highest among all Fitch-rated sovereigns.
The rating agency also projects the Turkish economy to slow down to 3.2% in 2022 from 11% in 2021, "balancing still favorable external demand dynamics, recovery in the tourism sector and an accommodative policy stance against tighter financing conditions, deterioration in consumer sentiment and the negative impact of a weaker exchange rate and high inflation."
It also expects the Turkish Central Bank's gross reserves to increase to $118 billion in 2022 "as export rediscount credits, FX conversion of deposits, a new FX swap with the UAE and 1 billion euro deposit from Azerbaijan's Sofaz will more than offset continued current account deficits and domestic FX demand, and limited portfolio inflows."