Turkey gets second S&P credit rating upgrade this year as government actions stabilise economy

Central bank's conservative monetary stance has helped steady the lira and bring down inflation

People at the Tahtakale Bazaar in Istanbul. Turkey's central bank remains optimistic on its inflation targets in the longer term, projecting 38 per cent by the end of the year and 14 per cent in 2025,Show more

S&P Global has upgraded Turkey's credit rating for the second time this year, citing the impact of the government's tight monetary stance that has helped stabilise the nation's economy.

The country's long-term sovereign credit rating was raised to BB- from B+, though its outlook was revised to stable from positive, New York-based S&P said on Friday.

A BB- rating, which is “non-investment grade speculative”, is three levels below investment grade, according to the ratings scale of S&P. Non-investment grade makes it more difficult for a country to get access to capital markets and raise funding when it wants to borrow.

The so-called Big Three ratings agencies have been optimistic about Turkey this year. S&P first boosted its credit rating in May on a “rebalanced economic strategy”, and Friday's action matches the two upgrades Fitch Ratings has given Turkey in 2024. Moody's Investors Service also upgraded the country in July, its first such move in a decade, citing improved governance.

The Central Bank of Turkey's conservative monetary stance has “enabled authorities to stabilise the lira, bring down inflation, rebuild reserves and de-dollarise the financial system”, analysts at S&P wrote.

“Turkey's savings gap with the rest of the world has narrowed, which is visible in the approximately 4 percentage points of gross domestic product decline in the current account deficit since 2022,” they said.

Bringing inflation down further, however, would still potentially be challenging, S&P said, as domestic credit growth is not keeping up with inflation and private investment remains stagnant.

Turkey has been battling chronic inflation in 2024, though Ankara's disinflation strategy lowered it to just a shade below 50 per cent in September, after peaking at more than 75 per cent in May, data from the Turkish Statistical Institute, or Turkstat, has shown.

The adjusted outlook reflects balanced risks over the next 12 months “to authorities' ambitious plans to bring down still elevated inflation, manage workers' wage expectations and rebalance the Turkish economy”, said S&P.

The country has been raising interest rates since last year to bring down inflation after it abandoned President Recep Tayyip Erdogan’s unorthodox policy of keeping interest rates low to spur growth.

He installed an economic team and appointed former New York Federal Reserve economist Fatih Karahan to help stabilise the economy and control consumer prices.

The central bank has a more optimistic view in the longer term. In August, it kept its inflation outlook unchanged, projecting 38 per cent by the end of the year and 14 per cent in 2025, before falling further to 9 per cent by the end of 2026.

Turkey's economy, on the other hand, has been stagnating, dropping to 2.5 per cent growth in the second quarter of 2024, after expanding 4.6 per cent a year earlier and 5.3 per cent in the fourth quarter of 2023, Turkstat said.

The Turkish lira remains one of the worst performers among emerging market currencies tracked by Bloomberg. It is down nearly 15 per cent so far in 2024.

S&P said it could raise Turkey's ratings should there be further progress on bringing inflation down closer to single-digit levels and restoring long-term confidence in the lira. However, lower ratings would be declared if pressures on Turkey's financial stability or wider public finances were to intensify.

“Evidence of [bringing down inflation] would include further de-dollarisation of the share of foreign currency deposits in the Turkish banking system, and increased liquidity and depth of domestic capital markets, particularly for foreign exchange operations,” it said.

In addition, with no elections scheduled before the end of March 2028, Turkey's policymakers would have the opportunity to implement policies to compress demand and inflation, through gradual fiscal and incomes policy tightening, the S&P analysts said.

“Stubbornly high services inflation, particularly in Turkey's three largest metropolitan areas … may, over the course of the next two years, increase pressure on Turkey's parliament to introduce measures to shield households against the rising cost of living,” they said.

Turkey has also been helped by its removal from the Financial Action Task Force's “grey list” of countries that face tighter monitoring for money laundering and terrorism financing in June, as the nation had made “significant progress” in its fight against illicit actions in the sector.