Fitch Praises Turkey’s FX Reserves Surge but Warns Against Policy Reversal

At the Fitch Turkey Event held in Istanbul, senior analysts from Fitch Ratings’ Sovereign, Corporate, Financial Institutions, and Sustainable Finance teams came together to share insights on Turkey’s economic progress. One of the key speakers, Douglas Winslow, emphasized that the significant improvement in Turkey’s foreign exchange reserves and external financing conditions played a major role in the country’s recent credit rating upgrades.

Strong Recovery in Foreign Exchange Reserves

Winslow highlighted the dramatic improvement in Turkey’s foreign exchange reserves over the past year. “FX reserves have risen to around $180 billion, compared to $100 billion in 2023 — a remarkable improvement,” he said. He also noted that the quality of reserves has strengthened. “If we exclude swaps with local banks and use a broader measure, we see that foreign reserves have grown much faster compared to gross reserves,” Winslow explained.

While praising the pace of improvement, he tempered expectations by saying that the growth rate would continue over the next two years, albeit at a slower speed.

External Financing Remains a Key Risk — But Stable

Discussing Turkey’s external financing needs, Winslow pointed out that it remains one of the country’s main vulnerabilities, but added that the resilience of Turkish banks and corporations provides stability. “This is a risk, but an important balancing factor is that banks and companies were able to roll over their external debt even during periods of stress. As a result, external financing flows have remained relatively stable. That gives us more confidence,” he stated.

Fitch’s Medium-Term View on Turkey

Addressing Fitch’s assumptions on Turkey’s external financing outlook, Winslow noted expectations for moderate capital inflows, no major decline in dollarization, and a slight widening of the current account deficit. He linked these expectations to the appreciation of the real effective exchange rate, which could hurt exporters’ competitiveness.

However, Winslow warned that the biggest policy risk would be a return to overly loose or unconventional monetary policies. “All these positive developments could be undermined if monetary policy were to become excessively loose again,” he cautioned.

Factors Behind Fitch’s Positive Rating Actions

Winslow outlined several structural strengths supporting Turkey’s rating outlook beyond the FX reserves: low public debt, high GDP per capita, a resilient banking system, and a track record of maintaining access to external financing. These elements contributed to Fitch’s decision to raise Turkey’s rating twice last year, restoring it to its pre-crisis level of BB-.

“We upgraded Turkey’s rating twice last year, returning it to BB-, the level it held before the crisis,” he reminded the audience.

Stability and Predictability in Policy Outlook

Winslow also underscored that Fitch’s credit assessments take a medium-term perspective, typically covering a period longer than five years. “Our ratings are based on a medium-term view. In our last review, we maintained a ‘stable’ outlook, meaning the probability of a rating change within the next 18 to 24 months is low,” he said.

Fitch expects Turkey’s current economic policy stance to remain largely intact in the near future. “From a short-term policy standpoint, we are reasonably confident that the existing framework will continue. For instance, next year’s real policy rate is expected to remain positive, around 3 percent — a mild easing compared to the current 6 percent. So, we don’t anticipate any major policy shift,” Winslow concluded.

A Balancing Act Between Growth and Caution

Winslow’s remarks capture the dual narrative surrounding Turkey’s economy: tangible progress in financial stability and foreign reserve accumulation, paired with lingering concerns about the durability of disciplined monetary policy. Fitch’s overall message was cautiously optimistic — acknowledging the government’s credible steps toward macroeconomic normalization while reminding policymakers that credibility can erode quickly if discipline falters.

In essence, Fitch’s stance signals confidence in Turkey’s direction but underlines that policy consistency remains the key to sustaining investor trust and long-term stability.