International credit rating agency Fitch Ratings Senior Director Erich Arispe Morales stated that the Turkish economy maintains its resilience in the face of global uncertainties and that they are closely monitoring whether a permanent improvement can be achieved in international reserves for a potential rating increase.
Morales answered the questions of an AA correspondent after Fitch Ratings confirmed Türkiye’s credit rating as “BB-” and its credit rating outlook as “stable” in its assessment last Friday.
Stating that they published an off-calendar evaluation for Türkiye in April due to the economic effects of the US/Israel-Iran War, Morales said that their evaluations on Friday last week were consistent with their decisions in April.
Morales stated that there was a decline in Türkiye’s international reserves during this period, but the reserves recovered somewhat afterwards. “Although international reserves have recovered, they still remain below pre-war levels. We have seen that inflationary pressures have decreased a little more. But of course, we are still in a situation where a high degree of geopolitical uncertainty prevails. This situation may have implications not only for Turkey but also for other emerging markets in terms of inflation and external balances.” he said.
Pointing out that the risks created by the war continue to create a high degree of political uncertainty for the economies of the region, including Türkiye, Morales continued his speech as follows:
“On the other hand, despite the increasing uncertainty and the decline in reserves, Türkiye’s policy adjustments are aimed at maintaining gains in inflation expectations or preventing a significant reversal. Moreover, we saw that positive dollarization remained relatively stable at 38 percent. The message given by the Central Bank officials and the economic management is that the commitment to the program of sustainably reducing inflation remains. Therefore, I think this is the important thing. We think that the Turkish economy is relatively resilient in the face of ongoing global uncertainties. In the long term, the Turkish economy has remained resilient in the face of macroeconomic imbalances compared to other economies.”
THE HEALTH OF THE BANKING SECTOR AND ACCESS TO FINANCE PROVIDES RESISTANCE AGAINST EXTERNAL SHOCKS
Morales stated that inflation in Türkiye is still high, but signs of slowdown continue, and said, “It is necessary to take into account that it may take some time for the inflation above 30 percent to slow down. Providing buffers regarding continuous determination and policy reliability is a very important element at this point. This is also a fragile process.” he said.
Pointing out the importance of a healthy banking sector in Türkiye and the capacity to access external financing, as well as policies that support the process of reducing inflation sustainably, Morales explained that real interest rates are at a level that will support the attractiveness of lira-denominated assets and prevent dollarization.
“Therefore, access to financing resulting from policies and the health of the banking sector are among the factors that give Türkiye the capacity to withstand external shocks,” Morales said. made his assessment.
Morales said that they are particularly monitoring Türkiye’s international reserves, as stated in Fitch Ratings’ evaluation on Friday, and emphasized that a permanent improvement in international reserves is critical for a potential positive decision in Türkiye’s credit rating.
Morales stated that they are therefore closely monitoring whether a significant and permanent improvement can be achieved in Türkiye’s international reserves and continued as follows:
“When combined with the relatively high external financing needs for Turkey, it is very important that the improvement in reserves is permanent. We expect Türkiye’s reserves to be slightly above the current level by the end of the year, but the permanence of this improvement is decisive. In addition, maintaining tight policy settings that will support a significant decline in inflation over time and reduce the balance of payment risk for a possible rating increase is another critical element. I think this is important to maintain confidence in an environment where external shocks and political uncertainties may occur.”
IT IS EXPECTED THAT THE POLICY INTEREST WILL BE REDUCED TO 35 PERCENT AT THE END OF THE YEAR
Morales, who also made evaluations about the Central Bank’s monetary policy decisions, stated that the Central Bank is trying to provide as clear a criterion as possible on how it evaluates the current risk balance and that this predictability is important.
Morales stated that the Central Bank took into account high geopolitical risks and the pressure on energy prices when determining the extent of relaxation in monetary policy and said, “We probably expect some loosening in monetary policy later in the year. This is based on the assumption that geopolitical risks will decrease and lower energy prices. Our prediction is that the Central Bank will reduce the policy rate by 200 basis points in total and reduce the policy rate to 35 percent at the end of 2026.” made his assessment.
