Turkey`s economic overhaul earns Fitch upgrade amid policy shift

Turkey celebrated a significant milestone as Fitch upgrades its credit rating, lauding the country’s shift towards orthodox economic policies on Saturday. Fitch’s decision to elevate Turkey’s credit rating to B+ from B, with a positive outlook, reflects growing confidence in the effectiveness of the government’s economic reforms initiated since June 2023. This, according to reports is an indication that Turkey’s tighter monetary policies at curbing inflationary pressures and enhancing macroeconomic stability, have proven successful.

Government’s praise for policy shift

According to a report by Daily Sabah, top Turkish officials have commended the success of the country’s policy overhaul, which paved the way for Fitch’s credit rating upgrade. Vice President Cevdet Yılmaz and Treasury and Finance Minister Mehmet Şimşek attributed the positive revision to the government’s foresighted economic program. They expressed optimism for further upgrades in the foreseeable future, highlighting the efficacy of Turkey’s proactive approach to economic management.

Implications for economic outlook

The upgrade signals a favourable outlook for Turkey’s economic trajectory, with analysts anticipating sustained improvements in macroeconomic indicators. Fitch’s positive outlook reflects expectations of a significant decline in inflation and continued reduction in external vulnerabilities. Turkey’s adherence to international norms and rule-based policies has been recognised as instrumental in fostering economic stability and attracting investor confidence.

Focus on monetary policy and reserves

Following Fitch’s decision to revise Turkey’s rating outlook from negative to stable on September 9, the central bank has implemented significant monetary policy adjustments. According to Bloomberg, this included raising the policy rate by 2,000 basis points to reach 45 per cent and introducing additional measures aimed at addressing inflation, which has surged to nearly 70 per cent.

As of March 1, the central bank’s gross foreign currency reserves increased to $80.5 billion, compared to $56.5 billion recorded at the end of May. This surge in reserves follows President Recep Tayyip Erdogan’s re-election, signalling a shift in policy direction. Increased demand for foreign money has put strain on reserves in recent weeks.

Positive projections and reserve management

Fitch’s positive outlook extends beyond the immediate term, projecting a further increase in international reserves by the end of 2025. The agency anticipates a gradual improvement in external financing conditions and a reduction in current account deficits, bolstering Turkey’s reserve coverage and overall economic resilience. The government’s measures to phase out foreign exchange-protected deposit schemes align with broader efforts to promote financial stability and reduce reliance on external support.

(With inputs from Bloomberg)

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