In its ‘Credit Outlook’ report for Turkey, international credit rating agency Moody’s stated that “the recovery in Turkey’s institutional capacity will take time even in a positive scenario” and added that “the outlook could be revised to positive if the tight monetary stance is maintained”.
International credit rating agency Moody’s Investors Service published a “Credit Outlook” report for Turkey. In its report, Moody’s stated that Turkey’s rating outlook is stable and said, “The outlook could be revised to positive if the tight monetary stance is maintained and wage agreements are in line with the CBRT’s objective of significantly reducing inflation.”
The credit rating agency also warned that if the transition to orthodox policies is short-lived, as it was in early 2021, and further macroeconomic stresses emerge, the outlook could be revised to negative and ratings could ultimately be downgraded.
Moody’s expects the Turkish economy to grow by 4.0 percent in 2023, 2.5 percent in 2024 and 3.0 percent in 2025, while average inflation will be 53.5 percent in 2023, 58.9 percent in 2024 and 39.1 percent in 2025. Turkey’s current account deficit to GDP ratio is projected to be 4.7 percent in 2023, 3.4 percent in 2024 and 3.0 percent in 2025.
Here is a summary of the assessment made by Moody’s for Turkey:
Turkey’s rating outlook is stable. The return to orthodox monetary policy is decidedly positive, with the Central Bank of the Republic of Turkey’s (CBRT) key policy rate now at 40%, compared to 8.5% before tightening began in late June. Monetary tightening also improves prospects for reducing Turkey’s large external imbalance and rebuilding the Central Bank’s foreign exchange reserves, both of which should reduce the country’s vulnerability to external shocks.
However, headline inflation is likely to rise further in the near term and inflation expectations remain too high. The key near-term risk is excessive wage increases, which could exacerbate demand-driven inflationary pressures. The minimum wage, which serves as a benchmark for broader wage agreements, is usually raised in January each year. A sharp slowdown in growth poses another risk, as this would increase the risk of a return to previous unorthodox policies.
“If the tight stance is maintained, the outlook may be upgraded to positive”
The outlook could be upgraded to positive if the tight monetary stance is maintained and wage agreements are in line with the CBRT’s objective of significantly reducing inflation. Further evidence of a narrowing of the current account deficit and an increase in FX reserves would be positive for the rating, especially if these trends are the result of an improvement in the country’s external competitiveness and continued capital inflows.
“Outlook could be revised to negative if the transition to orthodox policies is short-lived”
If the transition to orthodox policies is short-lived, as it was in early 2021, and further macroeconomic stresses emerge, the outlook could be revised to negative and ultimately downgraded. In such a scenario, pressure on the exchange rate would likely increase and FX reserves would be depleted again. Expectations of a significant increase in public debt and a corresponding deterioration in solvency would also put downward pressure on the rating.”
Moody’s was expected to publish its assessment report on Turkey last Friday, but the credit rating agency skipped the assessment of the credit rating. On the other hand, Moody’s is the credit agency with the lowest rating on Turkey.
Moody’s currently assesses Turkey’s credit rating as ‘B3’ and its rating outlook as ‘stable’.
