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| The Fitch upgrade of Turkey’s credit rating to "BB-" highlights the country's recent strides in improving fiscal and monetary policies. PHOTO: REUTERS |
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Turkey’s financial trajectory has seen a significant shift recently, and the global financial community has taken note. Fitch Ratings, a major global credit rating agency, has upgraded Turkey’s long-term foreign-currency Issuer Default Rating (IDR) from "B+" to "BB-", driven by the country's ongoing fiscal improvements and a stronger focus on monetary discipline. This marks another crucial moment in Turkey's economic evolution, reflecting greater stability and resilience in the face of economic challenges.
A Closer Look at Turkey’s Fiscal Policy Shift
Since last year, Turkey has been navigating a path of stringent monetary and fiscal policies aimed at combating inflation, which had reached alarming levels in recent years. At its peak in May 2023, inflation soared to 75%, putting enormous pressure on the Turkish economy. However, under new fiscal and monetary strategies, the country has managed to slow this surge, bringing annual inflation down to 51.97% in August.
This decline is attributed not only to tighter fiscal measures but also to the base effect — comparing current inflation with the high rates seen during the previous year. Additionally, easing food prices have played a key role in moderating inflation. However, inflation remains a significant challenge, and the Turkish Central Bank has reiterated its commitment to maintaining a tight monetary policy until inflation is brought closer to its target levels.
Turkey’s Medium-Term Economic Plan: Roadmap to Stability
Turkey’s government, in its Medium-Term Economic Program (MTP) released on Thursday, laid out its ambitious plan for controlling inflation in the coming years. The MTP projects a steady reduction in inflation, aiming for 41.5% by 2024, followed by 17.5% in 2025, and ultimately 9.7% by 2026.
This plan is underpinned by several key initiatives:
Tight monetary policy: Continued efforts by the Central Bank to control money supply and raise interest rates if necessary.
Planned budget cuts: Reducing government expenditures to alleviate fiscal deficits.
Wage adjustments: A more balanced approach to wage increases to prevent further inflationary pressures.
These measures are designed to stabilize Turkey’s economy, reduce its current account deficit, and maintain a healthier foreign currency reserve.
Fitch’s Positive Outlook and Caveats
Fitch’s decision to upgrade Turkey’s rating to "BB-" also came with a change in outlook, from positive to stable. This signals that while Turkey has made notable strides in improving its economic framework, challenges remain.
The rating agency highlighted that ongoing reforms, including stricter monetary policies, budget controls, and wage management, will help Turkey reduce inflation further and keep foreign currency reserves intact. Moreover, Fitch acknowledged Turkey’s progress in reducing its current account deficit, which has been a persistent issue over the years.
However, Fitch cautioned against the possibility of policy reversals, a concern stemming from Turkey’s recent history of unconventional economic approaches. The agency expressed reservations about potential resistance to these reforms from vested interests and the government's longstanding preference for low interest rates at the highest political levels. The risk of reversing these tight policies could slow down the progress Turkey has made and hinder long-term stability.
Turkey’s Economic Reforms and Global Market Sentiment
The Turkish government has shown a firm commitment to improving its economic fundamentals, as evidenced by the continued tightening of fiscal policies. The recent changes, especially the efforts to cut budget deficits and reduce external vulnerabilities, have started to restore investor confidence in Turkey.
These reforms come at a critical time for Turkey, especially as it seeks to attract more foreign investment. With improved credit ratings, Turkey is now in a stronger position to negotiate better terms in international capital markets, enhancing its ability to secure loans and financing for future growth.
The Role of International Rating Agencies
Fitch’s latest upgrade marks the second credit rating improvement for Turkey in 2023, after a similar move earlier in the year. In July, Moody’s, another leading credit ratings agency, raised Turkey’s rating from "B3" to "B1", citing similar reasons—improvements in governance and tighter monetary policies.
The upgrades by both Fitch and Moody’s are pivotal because they influence international perceptions of Turkey’s economic health. Improved credit ratings make it easier and cheaper for countries to borrow money on international markets, as they signal lower risks to potential lenders and investors.
The Path Forward: Turkey’s Economic Outlook
Despite these positive steps, Turkey’s path to sustained economic recovery remains challenging. The country’s economic health depends heavily on the successful implementation of its Medium-Term Economic Program, continued monetary discipline, and a favorable global economic environment. As inflation rates slowly decrease, Turkey will need to balance growth objectives with the need to stabilize its currency, reduce external debts, and maintain social stability.
For now, the upgrade by Fitch provides a vote of confidence that Turkey’s current policies are on the right track. However, it will be crucial for the Turkish government to resist any urge for premature easing of fiscal and monetary constraints, as any policy reversal could quickly undo recent gains.
Conclusion
The Fitch upgrade of Turkey’s credit rating to "BB-" highlights the country's recent strides in improving fiscal and monetary policies. While significant challenges remain, especially in controlling inflation, Turkey’s economic prospects are steadily improving. Investors and international stakeholders are closely watching to see if the country can maintain its discipline and build on these reforms to ensure long-term financial stability and prosperity.
As Turkey works toward achieving its inflation and economic growth goals, sustained commitment to reforms will be key. The road ahead is long, but the foundation for success has been laid.(alert-success)
