Fitch Solutions Warns Turkey’s Disinflation Is Losing Momentum,  SocGen praises TL Assets

Fitch Solutions BMI economist James Bennett says Turkey’s short-term growth remains resilient, but the disinflation process has slowed sharply. Bennett highlights weak fiscal discipline, rapid credit expansion and the possibility of an early election as the main risks to the outlook. While foreign investor interest is improving, he warns that meaningful capital inflows will only materialize after durable macroeconomic stabilisation. Societe Generale, meanwhile, sees Turkey among the top three emerging markets likely to deliver the highest FX returns in 2026.

Growth Holds Up, but Disinflation Stalls

Turkey’s economy continues to demonstrate strong short-term growth dynamics, but the pace of disinflation has “clearly slowed,” according to Fitch Solutions BMI macroeconomist James Bennett.

Speaking to Bloomberg HT, Bennett said the firm’s latest report sets a “no-landing” scenario as the baseline for Turkey, meaning economic activity is set to remain robust while inflation struggles to fall substantially.

Bennett noted that headline and core inflation have been unable to dip below the 1.5% month-on-month range, signalling the downward momentum in price pressures has stalled. This slower disinflation, he warned, is becoming a critical challenge for policymakers.

Fiscal Tightening Falls Short of Targets

Bennett stressed that the government’s fiscal discipline has not strengthened to the degree policymakers anticipated.

Turkey’s budget deficit, he said, remains close to 2024 levels, reflecting a fiscal stance that is “not sufficiently tight” given the disinflation objective. Public sector spending pressures, reconstruction costs and political considerations all limit fiscal consolidation.

On the credit side, Bennett drew attention to bank lending growing roughly 2% per month, a pace he described as “too strong” for an economy seeking to contain inflation. While credit expansion supports activity, it simultaneously delays the disinflation process.

Market Perception Becoming a Key Vulnerability

Bennett warned that investor perception could become a major vulnerability if markets conclude that inflation’s downward trend has ended.

“If market participants begin to think disinflation is over, the shift in sentiment could trigger aggressive selling in the lira and lira-denominated bonds,” he said. “This is the most critical risk.”

Although Turkey’s risk premium has eased and foreign interest is slowly returning, Bennett underscored that inflows remain “weak and inconsistent.”

Early Election Speculation Complicates Policy Outlook

Fitch Solutions is also concerned about the political timetable. The government’s Medium-Term Program (OVP) plans a transition to a “structural transformation phase” by June 2026, but Bennett said several conditions required for this transition are not yet in place:

• Disinflation has paused

• The budget deficit remains high

• Central Bank reserves are insufficient

• Structural fiscal tightening is uncertain

Bennett added that growing expectations of an early election in 2027, instead of the scheduled 2028 date, could make it more difficult for the government to maintain a strict fiscal stance.

Foreign Investor Interest Returns Slowly

Foreign investors are showing renewed interest in Turkish assets, but Bennett said the improvement is still “limited and fragile.”

Sustainable inflows will require:

• Stronger macroeconomic stability

• A more decisive fall in inflation

• Successful implementation of the OVP

Turkey still offers long-term potential thanks to its geographic position, industrial capacity and demographics. However, Bennett flagged two structural obstacles weighing on competitiveness:

• High labor costs

• An overvalued Turkish lira

These factors reduce Turkey’s relative appeal for export-oriented investment.

Societe Generale: Turkey Among Top EM FX Performers in 2026

A separate report from Societe Generale forecasts renewed dollar strength in 2026, which is expected to pressure most emerging-market currencies. Despite this backdrop, SocGen sees Turkey, Nigeria and Brazil as the top three currencies likely to deliver the best FX returns next year.

SocGen’s key findings include:

• EM spot FX returns expected to average just 0.3% in 2026

• Total FX returns expected to hover near 3%

• Many EM currencies are now “overvalued” after strong gains this year

• Central and Eastern European currencies are viewed as 15–20% overvalued

• The Colombian and Mexican pesos are seen as 10–15% overvalued

However, SocGen expects local-currency EM bonds to deliver positive returns—especially in Turkey and Brazil.

Turkey’s Macro Path: High Risks but Selective Advantages

Combining both analyses, Turkey appears to face a complex mix of supportive and destabilizing factors:

Downside Risks

• Stalled disinflation

• High budget deficit

• Elevated credit growth

• Possible early elections

• Structural competitiveness issues

• Risk of renewed market volatility

Potential Upside

• Improving foreign investor sentiment

• Strong economic activity

• Robust industrial base

• Prospects for favorable FX returns

• Long-term investment appeal

The next phase of Turkey’s economic outlook will depend heavily on the government’s ability to maintain tight fiscal policy, achieve meaningful disinflation, and rebuild Central Bank reserves before global financial conditions tighten further.