Fitch Ratings has affirmed Turkiye’s Long-Term Foreign-Currency Issuer Default Rating (IDR) at ‘BB-‘ with a Stable Outlook. The decision was widely expected and is not likely to lead to market turbulence on Monday. A week ago, contrary to expectations, Moody’s had faield to upgrade Turkey.
A full list of rating actions is at the end of this rating action commentary.
Key Rating Drivers
Weak Policy Framework, Low Debt: Turkey’s ratings reflect a record of political interference in monetary policy, high inflation, low external liquidity in the context of high financing requirements and weaker governance relative to peers. These credit weaknesses are set against low government debt, continuous access to external financing, a resilient banking sector, and high GDP per capita relative to rating peers.
Expectation of Consistent Policies: The Central Bank of the Republic of Turkiye (CBRT) has begun its monetary easing cycle with two consecutive 250bp cuts to 45% since December. We expect it to reduce its policy rate to 28% by end-2025. The CBRT will maintain a tight monetary stance to support disinflation with the aid of macroprudential measures (including monthly credit growth limits) and continued real appreciation of the lira (albeit to a lower degree compared with 2024). In our baseline, overall policy consistency will improve in 2025 due to projected fiscal consolidation and the relatively moderate minimum wage increase (30%).
High Inflation, Policy Risks: We forecast average annual inflation to decline materially to 32.8% in 2025, down from 60.2% in 2024. Turkiye will continue to have the highest inflation among ‘B’ and ‘BB’ rated sovereigns. Given the still high projected inflation, sticky expectations and still volatile market sentiment, the rapid easing of monetary policy or the abandonment of the current policy direction, which is not our base case, could reignite inflationary pressures and consequently macro-financial stability and balance of payments risks.
Improved External Buffers: International reserves rose by USD14 billion to USD155 billion in 2024 and their composition improved significantly. Since unwinding FX swaps with local banks, the central bank’s net foreign assets (excluding FX swaps with other central banks) rose from a low of minus USD75 million to USD39 billion in early 2025 due to reduced financial dollarisation and FX demand, capital inflows and increased access to external borrowing.
Positive real interest rates, low current account deficits and capital inflows will likely support the durability of the improvement in external buffers. Consequently, we forecast Turkiye will maintain reserves coverage broadly in line with peers, as reserves will rise to USD175 billion by 2026, equivalent to 4.8 months of current external payments.
Reduced Contingent FX Liabilities: FX-protected deposits have fallen below USD30 billion in early-2025, from a peak of USD138 billion in August 2023. We expect FX -protected deposits to continue to decline, given the expectation of continued positive real rates, the lira’s moderate nominal depreciation and the CBRT’s regulatory changes to accelerate the unwinding of the product. Financial dollarisation has declined to 33% (39% when including FX-protected deposits) from 43% at end-March (58% including FX-protected deposits).
Lower External Deficits, High Financing Requirements: Fitch estimates that the current account deficit declined to 0.8% of GDP in 2024. A tight policy mix leading to reduced gold imports and softer domestic demand, combined with export and tourism revenue growth will lead to current account deficits averaging 1.5% of GDP in 2025-2026, well below the projected 2.4% ‘BB’ median.
External buffers have improved but remain low given high financing requirements. Total external debt maturing over the next 12 months was USD233 billion (including trade credits) at end-November, leaving Turkiye vulnerable to changes in investor sentiment. Nevertheless, the sovereign and private sector have a resilient record of access to external financing.
Fiscal Consolidation: The central government deficit declined to an estimated 4.8% of GDP in 2024, from 5.2% in 2023, and Fitch expects fiscal consolidation to continue with a 3.3% of GDP deficit in 2025 and 3% in 2026. The deficit reduction will be driven by lower earthquake-related spending, increased expenditure discipline, a gradual reduction in electricity and gas subsidies, and tax revenue measures seeking to improve collection and reduce informality.
Low Government Debt: We estimate that general government debt declined to 25.2% of GDP at end-2024 and will average 26.3% of GDP in 2025-2026, less than half the projected 55.2% ‘BB’ median, driven by still high nominal GDP growth, the real appreciation of the lira and low primary deficits. We forecast interest payments-to-revenue to continue to increase, reaching 10.9% in 2025, slightly above the projected 10.1% median. The share of domestic debt subject to interest rate re-fixing within 12 months remains high at 55.7 %, while the share of foreign-currency-denominated debt declined to 56.1% in 2024 from 64.2% at end-2023.
Growth, Credit Slowdown: We estimate that GDP growth slowed to 2.9% in 2024 and expect it to remain moderate at 2.6% in 2025, due to the continuation of a tight monetary policy stance combined with significant fiscal consolidation yoy and moderate minimum wage increase. The EU’s projected gradual recovery will support net exports. Given the highly accommodative policy stance pre-June 2023, Fitch assigned a Macro-Prudential Indicator (MPI) Score of ‘3’ to Turkiye, indicating high vulnerability due to rapid credit and house price growth in in recent years. Both have decelerated since the start of the rebalancing process.
Geopolitical Risks, Weaker Governance: Relations with the US and EU have improved, but the volatile regional environment (including the situation in Gaza and war in Ukraine) and efforts to maintain an active and independent foreign policy, for example, in relation to developments in Syria, bring geopolitical challenges. Governance indicators, as measured by the World Bank, have deteriorated continuously over the past decade and represent a weakness relative to ‘B’ and ‘BB’ peers.
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