Sustained improvement in policy consistency could be positive for Türkiye's credit rating: Fitch

By Sevgi Ceren Gokkoyun

NEW YORK (AA) - International credit rating agency Fitch Ratings said on Friday that a sustained improvement in policy consistency could be positive for Türkiye's credit rating.

It said in a statement, referring to Türkiye’s local elections, concluded last month: "Expected post-election fiscal tightening would strengthen the effectiveness of Turkiye’s monetary policy, in the context of weakened transmission channels."

"If sustained, this improvement in policy consistency should support lower inflation, a narrower current account deficit and a recovery in international reserves," it added.

The agency mentioned that pre-election public spending contributed to the growth of the budget deficit, with the central government budget deficit in the first quarter estimated to have reached 5.2% of gross domestic product (GDP).

Fitch also forecast that the non-interest deficit would be 2.6% of GDP, highlighting that fiscal policy contributed to resilient domestic demand in the first quarter.

"We believe the government will reduce the fiscal deficit in the rest of 2024 by slowing spending growth, especially that which is not related to earthquake reconstruction," it added, referring to earthquakes in southern Türkiye in February 2023.

The agency said: "Improved policy consistency should support lower inflation, a narrower current account deficit and a recovery in international reserves.

"Inflationary pressures have eased (month-on-month inflation dropped to 3.2% in March from 6% in January) and we forecast annual inflation to decline to 40% by end-2024 from 68.5% in March," it added.

Turkish economic officials have said they expect inflation to start a sustained drop in the second half of the year.

*Writing by Alperen Aktas from Istanbul