S&P Global Ratings Upgrades Turkey’s Credit Rating Outlook

S&P Global Ratings Upgrades Turkey’s Credit Rating Outlook Following Government’s Rebalanced Approach

In a significant development for Turkey’s economy, S&P Global Ratings has upgraded the country’s credit rating outlook, citing the government’s strategy of taking a more rebalanced approach that is expected to generate confidence in its economy.

The country’s long-term rating was raised one notch up to “B+” from “B”, with a positive outlook, the New York-based ratings agency announced on Friday. A “B+” rating, which is “highly speculative”, is four levels below investment grade, making it more difficult for a country to access capital markets and raise funding when needed.

S&P expects Ankara to take measures to streamline fiscal, monetary, and incomes policies, including cuts to current non-wage expenditures in 2024. The agency also noted that any spending related to the recent earthquake that hit Turkey and neighboring Syria may take longer to execute.

The decision to upgrade Turkey’s credit rating outlook follows local elections in which President Recep Tayyip Erdogan’s party suffered a surprise and heavy defeat. S&P believes that a return to a more orthodox policy will improve the coordination between monetary, fiscal, and incomes policy, leading to rising portfolio inflows and narrowing current account deficits over the next two years.

However, Turkey is facing chronic inflation following years of unorthodox policies. The country’s central bank expects inflation to rise to as high as 75 per cent in May before dipping to about 36 per cent by the end of this year. The Turkish lira is also among the worst performers among emerging market currencies, down nearly 9.5 per cent so far in 2024.

In response to mounting inflationary pressure, Turkey’s central bank recently raised its benchmark interest rate to 50 per cent. S&P expects the central bank to maintain this rate for the rest of 2024 and be vigilant against depreciation pressures on the lira.

Overall, S&P’s decision reflects optimism about Turkey’s economic prospects, with the expectation of improved policy coordination and stability in the coming years. As the country continues to navigate economic challenges, the upgraded credit rating outlook signals a positive step towards bolstering investor confidence and economic growth.