S&P Global Ratings Central and Eastern Europe (CEE) and Commonwealth of Independent States (CIS) Country Credit Ratings Director and Turkey Leading Analyst Karen Vartapetov stated that they expect the disinflation process to continue in Türkiye and pointed out the importance of disinflation and international reserves for the possible increase in Türkiye’s credit rating.
In its last credit rating assessment published in April, S&P Global Ratings confirmed Türkiye’s credit rating as “BB-/B” and maintained its rating outlook as “stable”.
On Friday, October 16, the institution bypassed its expected assessment of Türkiye’s credit rating and published an analysis that did not include a rating decision.
Vartapetov answered AA correspondent’s questions regarding credit rating evaluation and Turkish economy.
Stating that S&P Global Ratings’ current credit rating and outlook for Türkiye remains valid, Vartapetov said, “It is not the first time that we publish our assessment of Türkiye on Monday instead of Friday. We do this for other countries from time to time. If there is no action on the credit rating, that is, a change in rating, we tend to publish the statement on Monday instead of Friday in order not to confuse the markets.” he said.
Vartapetov stated that they examined the basic scenarios for the Turkish economy and made some updates in their forecasts, and concluded that the current basic scenario remains valid.
Noting that the “stable” outlook for the Turkish economy indicates that the up and down risks on the credit rating basically balance each other, Vartapetov stated that the fact that they did not publish last week’s rating evaluation does not mean that an “unusual evaluation” will be made in the coming days.
“THERE IS PROGRESS IN THE BASIC INFLATION TREND”
Vartapetov stated that they expect disinflation to continue in Türkiye, as shared in the analysis they published at the beginning of the week, and said, “If disinflation is potentially stronger than expected, we think this is an upward factor in terms of credit rating. The single-digit inflation target may be a bit ambitious, but I think low double-digit levels will be more realistic. However, other criteria, such as the adequacy of foreign exchange reserves and the continued confidence of households in Turkish lira-denominated assets, also play a decisive role in the credit rating. The Central Bank’s international reserves “It is important that all this takes place in an environment where domestic residents continue to have confidence in the Turkish lira and that there are no policy changes. Such a scenario would be compatible with a higher credit score.” he said.
Stating that there are some positive signs of slowdown in services inflation, which reflects the basic trend of inflation, Vartapetov explained that, nevertheless, time is needed to anchor inflation expectations because price-setting behavior is retrospective.
Vartapetov stated that monetary policy should also be convincing to ensure that households and domestic residents keep their savings in local currency instead of foreign currency.
Sharing the information that the energy price shock resulting from the war in the Middle East caused the headline inflation in Türkiye to increase by approximately 7 points, Vartapetov continued his speech as follows:
“However, what particularly worries us is that the second round effects of the energy price shock have remained relatively limited. This is due to the slowdown in domestic demand. The Central Bank has already been trying to achieve this for a long time. We see strong evidence that domestic demand is weakening, which means that it is becoming more difficult for companies to pass on increasing costs to consumers. This is the point where the monetary policy mix and the monetary policy stance in general finally begins to have an impact on the economy. There is real progress in terms of the underlying inflation trend. On the other hand, external conditions remain extremely challenging and variable. Global commodity and energy markets, decisions of global central banks. Center “It makes it harder for the Bank to sustain disinflation. The Central Bank may need to be cautious to continue anchoring inflation expectations.”
Vartapetov stated that there is a difficult balancing process in this respect and noted that the conditions faced by policy makers are extremely challenging.
Stating that their basic scenario is that the Central Bank may reduce interest rates by the end of the year and that they foresee the policy rate as at least 35 percent at the end of the year, Vartapetov announced that they expect interest rate cuts to continue next year. Vartapetov added that these predictions depend on the course of energy prices, especially oil.
Vartapetov stated that the risk of problems in the balance of payments could create downward pressure on Türkiye’s credit rating, and said that such a risk could lead to a wider current account deficit and households turning to dollarization.
“THERE IS NO EVIDENCE THAT IT AFFECTS CONFIDENCE IN THE TURKISH LIRA”
Sharing his observations on the effects of the liquidation process of some funds in Türkiye, which started last month, Vartapetov stated that the macroeconomic effects were quite limited because the liquidation process of the funds was related to capital markets rather than a broader financial crisis.
Vartapetov continued his speech as follows:
“We do not see strong evidence that a problem in narrow asset classes has spread to broader financial markets or affected confidence in the Turkish lira. On the contrary, funds from this asset class have moved into Turkish lira-denominated bank deposits. This is one of the best outcomes that can be achieved in such a situation. However, it is difficult to come to a definitive conclusion at this stage, as the story continues to develop and the investigation is ongoing. We need to see how the government will approach the unresolved fund liquidations and the compensation of investors’ losses. Additionally, if they are not satisfied with the government’s approach, it is difficult to reach a definitive conclusion. “We also have to monitor whether it will be damaged in the future. So there are risks. But so far the impacts have been relatively limited. The initial response from the authorities and the timing of this response have been quite strong.”
Saying that such events are “not an unusual situation” for emerging markets, Vartapetov added that the authorities are focusing on what kind of results they will draw from this process and the steps they will take towards similar crises in the future.
3 PERCENT ECONOMIC GROWTH IS EXPECTED THIS YEAR
According to the forecast of S&P Global Ratings, inflation in Türkiye is estimated to be 30.9 percent on average this year and 21.7 percent in 2027.
It is estimated that growth in the Turkish economy may be 3 percent this year, compared to 3.7 percent last year. Due to the war in the Middle East, the growth expectation for this year is 0.4 points below the institution’s previous estimates. Economic growth is expected to accelerate again in 2027, reaching 3.7 percent.
