International credit rating agency Standard & Poor’s (S&P) has reaffirmed Turkey’s credit rating as “B” while upgrading the credit outlook from “stable” to “positive.”
The announcement emphasized that policymakers in Turkey have made progress in cooling down the overheating economy. Additionally, it highlighted the gradual rebuilding of the net foreign exchange reserve stock by the Central Bank of the Republic of Turkey (CBRT).
This change in credit outlook from “stable” to “positive” suggests that Standard & Poor’s sees a more favorable economic environment and improved conditions for Turkey’s creditworthiness in the near future. The “B” credit rating indicates that Turkey is considered to have a speculative-grade credit quality.
S&P’s decision summary is below:
Turkish policy makers are making progress toward cooling down the overheated economy, while slowly rebuilding the central bank’s depleted stock of net foreign currency reserves.
Turkiye’s Central Bank (CBRT) has increased its key interest rate by 31.5 percentage points (ppts) since June; deposit rates on local currency savings now exceed those on foreign currency savings products by nearly 40 ppts; this should encourage the de-dollarization of domestic savings.
Turkiye’s twin deficits are declining. We project that the fiscal deficit for 2023 will be lower than targeted at 4.3% of GDP, and that the current account deficit will gradually narrow as imports decline sharply during the last four months of the year and into 2024.
The economic landing may need to be harder than we currently project if Turkiye is to post sustained external surpluses, reduce its leverage, and rebuild CBRT net reserves.
We revised the outlook on our ‘B’ unsolicited long-term sovereign credit rating on Turkiye to positive from stable and affirmed all our foreign and local currency ratings on the sovereign.
OUTLOOK
We could raise the rating should balance of payments outcomes improve, and domestic savings in Turkish lira rise, leading to a rebuilding of Turkish usable foreign currency reserves (gross reserves, minus foreign currency borrowed from domestic residents).
Downside scenario
We could revise the outlook back to stable if pressures on Turkiye’s financial stability or wider public finances were to intensify. This could occur in connection with currency devaluation and a reversal of policies designed to reduce inflation.
Upside scenario
If Turkiye’s balance-of-payments improved further, leading to more rapid foreign currency reserve accumulation, and we saw a reduction in dollarization within the next 12 months, we could raise the long-term sovereign rating by one notch. The ratings could also rise over a longer period, if policies become more predictable based on stronger institutional checks and balances combined with a reaffirmation of the independence of key economic institutions such as CBRT and the financial regulator.