Turkey receives first ratings upgrade from Moody's in a decade on improved governance

The credibility and effectiveness of the country's monetary policies have risen, reducing the risk of future inflation shocks

Shoppers in Istanbul. Turkey's central bank said that inflation hit 69.8 per cent in April, but expects it to gradually decrease through the end of 2025. Reuters

Moody's Investors Service has upgraded Turkey's sovereign credit rating, the first such rating action in more than a decade, citing improvements in governance and economic policies.

The country's sovereign credit rating was raised to “B1" from “B3", with a positive outlook, New York-based Moody's said on Friday.

A “B1” rating, which is “highly speculative”, is four levels below investment grade, according to the ratings scale of Moody's. Non-investment grade makes it more difficult for a country to get access to capital markets and raise funding when it wants to borrow.

This matches S&P Global Ratings' action in May, in which it upgraded Turkey to “B+".

Moody's' decision was driven by improvements in Ankara's policies, “more specifically the decisive and increasingly well-established return to orthodox monetary policy”.

“This is yielding first visible results in terms of reducing Turkey's major macroeconomic imbalances … the positive outlook reflects a balance of risks skewed to the upside,” it said.

“As the credibility and effectiveness of monetary policy rises, macroeconomic stability and strengthened institutions may allow Turkey's underlying credit strengths … reduce the risk of long-lasting inflation shocks in the future.”

Turkey is facing economic challenges, underpinned by chronic inflation. President Recep Tayyip Erdogan installed an economic team to stabilise the economy and control consumer prices last year.

Inflation in the country hit 69.8 per cent in April, above initial projections, the Central Bank of Turkey said in its latest inflation report released in May.

The regulator is more optimistic in the longer term, expecting inflation to go down to 38 per cent by the end of 2024 and further to 14 per cent at the end of 2025, it said.

That silver lining is in line with government data released in May that showed Turkey's economy expanded by 5.7 per cent in the first quarter of 2024, as domestic demand strengthened.

“Inflation and domestic demand have started to moderate, giving us greater confidence that inflationary pressures will ease significantly over the coming months and into 2025,” Moody's said.

The Turkish lira, however, remains one of the worst performers among emerging market currencies tracked by Bloomberg. It is down about 10 per cent so far in 2024.

However, the central bank's move of “rapidly enhancing” the credibility of its monetary policy is helping to restore confidence in the currency, Moody's said.

“Moreover, the tight policy stance is already materially reducing Turkey's elevated external vulnerability.”

Another positive development for Turkey is its removal from the Financial Action Task Force “grey list” of countries that face tighter monitoring for money laundering and terrorism financing last month, as the country has made “significant progress” in its fight against illicit actions in the sector.

The decision is expected to boost investor confidence in Turkey's economy and would have “extremely positive consequences” for its financial sector, Turkey's Vice President Cevdet Yilmaz said on X after the FATF's move.

Moody's cautioned, however, that external vulnerability risks remain “significant” for Turkey. Also, while political risks have declined, they remain a key rating constraint, it said.

It noted that with the next parliamentary and presidential elections in 2028, this gives Ankara time to bring inflation down to previous low levels, “even at the cost of temporarily low economic growth”.

“However, a very sharp slowdown in growth coupled with rapidly rising unemployment could lead to political pressure for an early easing of the monetary policy stance,” Moody's said.

“We expect that the authorities will maintain the tight economic policy stance for some time, so as to ensure that inflation expectations converge to the central bank's target on a sustained basis.”