Fitch analyst states Turkish economic policy pivot ‘more durable’

Fitch Ratings has “greater confidence” that Türkiye’s current economic policy pivot is “more durable,” a senior director in Fitch Ratings’ sovereigns group and primary Türkiye analyst told an interview with Anadolu Agency (AA) Tuesday.


“Regarding the effectiveness of the policy shift, improving reserve levels, reduced contingent liability in terms of effects of protected deposits without increasing dollarization, reduced current account deficit and easing inflation expectations, these developments warrant the rating that we took on Friday,” Erich Arispe Morales told AA.

Morales answered the questions of AA after Fitch Ratings raised Türkiye’s credit rating from a “B” to a “B+” and its outlook from stable to positive last week.

He recalled that the credit rating agency affirmed the country’s credit rating as “B” in September last year and increased the rating outlook from “negative” to “stable” and said: “It reflected our assessment that the policy pivot was consistent with reducing the risk of macroeconomic and financial instability. Since then, we have greater confidence that the current policy pivot is more durable.”

“The market has opened not only for the sovereign but also we saw that banks and corporates also accessing external financing after the policy pivot,” the analyst said.

He stressed that there have been other “welcome developments” in the Turkish economy, including the decline in Türkiye’s five-year credit risk premium.


Reserves expected to rise

Furthermore, Morales mentioned that economic policies were effective in easing inflation expectations and bringing inflation down gradually.

“We think that the policy mix now is consistent with reducing the current account deficit in Türkiye. We have seen that after peaking around $60 billion on a 12-month rolling basis in May 2023, it has started to come down and ended the year at $45 billion,” he said.

“We expect that going forward, the current account deficit in the country will reduce further to around 2.6% of gross domestic product (GDP) in 2024 and 2.2% of GDP in 2025, which is below the projected medians for countries with similar rating as Türkiye,” he explained.

“Also, with the caveat that we’ve seen an improvement in the international reserve levels, and we know that if the policy settings are sustained as our base case assumes we will be seeing that reserve coverage will improve to four, five months in 2025. That would bring Türkiye’s reserve coverage above what is expected for countries with a similar rating, that is the B rating category,” the analyst added.


Significant developments in FX-protected deposits

“We have seen two important developments about FX-protected deposits. First is that it has declined from around $130 billion at the end of August 2023 to currently $74 billion,” said Morales, referring to a steep fall in the volume of deposits under the so-called KKM scheme which authorities began rolling back last summer.

He emphasized that the decline did not lead to a significant increase in financial dollarization.

“Moving on six months from our September review, we can say that we have greater confidence that the policy shift will be sustained,” Morales said.

He said that various factors, such as the “global economy, growth prospects and the monetary policy or political developments” have been influential in the decisions by foreign investors regarding Türkiye.

“It is important to note that one of the factors we noticed is that the policy shift has not only reduced macroeconomic financial stability risk, but it also actually led to an improvement in external financing conditions.”

“So, in that regard, it seems that the assessment of both the credibility, durability and consistency of the policy framework has played and will continue to probably play an important role in investor expectations for the country,” he added.


Inflation forecasts

Morales said that although inflation is expected to decline significantly over the next few years, “inflation remains a key policy challenge for Türkiye.”

“The inflation we have seen in the first two months of this year has reflected some policy measures implemented since the end of last year. One of them is the increase in the minimum wage of 49% at the beginning of the year. This has provided some impetus to domestic demand and household consumption.”

“We also have seen public spending and the use of credit card growth has also moved up in Türkiye. Those factors have led to higher inflationary pressures in the first two months of the year. We acknowledge that,” he added.

“We stay with our expectation that both fiscal monetary credit and income policies will be consistent with attempting to bring inflation down and to have a month-to-month path that approaches what the central bank is projecting at the end of this year,” said Morales.

“However, we also noted that we expect inflation to be above the central bank projection of 36%, at about 40%,” he added.

Moreover, he mentioned that they expect inflation to “average around 58% this year and coming down to 29%,” as it remains “a key policy challenge for Türkiye not only this year and next but also over the medium term,” he said.

“Evidence of sustained progress in Turkiye’s disinflation process and greater confidence that the current policy normalization and rebalancing process will lead to a sustained decline in inflation,” he added.