Türkiye may be on the verge of receiving another credit rating upgrade in November from S&P Global, according to a top analyst at the agency, amid strong improvement in foreign exchange reserves and a rapidly narrowing current account deficit.
More than a year-long tight monetary and fiscal policy drive has seen Türkiye rebuild its foreign exchange coffers, lower imports and sharply rein credit growth to curb overheated demand and lower stubborn inflation.
The policy reversal since last June helped Türkiye become the only country to secure upgrades from the world’s three leading credit agencies – Fitch Ratings, Moody’s and S&P Global – this year.
Frank Gill, sovereign ratings senior director at S&P Global Ratings, said some credit rating criteria, especially external indicators, have improved after the policy change, particularly citing the increase in net foreign exchange reserves.
In May, S&P upgraded Türkiye’s ratings to “B+” from “B,” saying that the coordination between monetary, fiscal and income policy is set to improve amid external rebalancing, while it maintained a “positive” outlook.
It will announce its next assessment in early November. Gill emphasized that they take into account many indicators, especially the net reserve levels and the positive trend in the current account deficit, in their credit rating decisions.
“A few credit metrics for the Turkish economy have improved, particularly external indicators. We estimate that net foreign currency reserves at $105 billion are well over twice what they were last year,” Gill said.
Narrowing current account deficit
Gill said Türkiye’s current account deficit is narrowing very quickly, reflecting a lower energy bill, with oil prices continuing to soften, as well as lower net gold imports.
“We are forecasting that current account deficit will be slightly above 1% of GDP for 2024 as a whole,” he said, adding that these two factors are a “big deal” and positive, and the rating action is largely on those two factors. “I think this is a big change on the external side,” he said.
However, Gill said there are also a lot of indicators that are going to be reviewed to reach this decision as one of the big questions for them is what is the direction of public finances in the country as well as if Türkiye will maintain the same course of policies for multiple years.
He said their baseline projection is that they will, but there are risks to their baseline, in particular, “austerity fatigue.”
In that regard, to the question of whether an upgrade for Türkiye is still possible in November, Gill said: “Sure, when we do have a positive outlook. I think it is a big deal that net reserves are now above $100 billion comfortably and that current account deficit is narrowing.”
Earlier this month, credit rating agency Fitch upgraded Türkiye’s long-term foreign-currency Issuer Default Rating to “BB-” from “B+,” citing improved fiscal policy and better external buffers.
Fitch, which has upgraded Türkiye’s credit rating for the second time this year, also changed its outlook from “positive” to “stable.”
In July, ratings agency Moody’s upgraded Türkiye’s ratings to “B1” from “B3,” citing improvements in governance and a tighter stance on monetary policy.
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