UPDATE - Fitch upgrades Türkiye's rating to BB- from B+ with stable outlook

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​​​​​​​By Ovunc Kutlu

ISTANBUL (AA) - Fitch Ratings said Friday it upgraded Türkiye's long-term foreign currency issuer default rating to BB- from B+ with a stable outlook.

The rating agency said the upgrade reflects improved external buffers, reduced contingent foreign exchange liabilities, the expectation of lower inflation and lower current account deficits.

Inflation in Türkiye is expected to finish the year at 43%, resulting in average inflation of 59.5% for 2024, according to Fitch.

The agency forecast inflation to average 31% next year and 21% by the end of 2025.

"Given the still high projected level of inflation, the premature easing of monetary policy or the abandonment of the current policy direction, which is not our base case, could reignite inflationary pressures and consequently macro-financial stability and balance of payments risks," it said in a statement.

- Improvement in external buffers

Fitch said reduced financial dollarization and foreign exchange demand, capital inflows and increased access to external borrowing have lifted Türkiye's reserves to $149 billion, with net reserves at $41 billion.

Reserves are forecast to increase to $158 billion by the end of the year and $165 billion by the end of 2025.

The agency said positive real interest rates, low current account deficits and the gradual decline in foreign exchange-protected deposits will likely support the durability of improvement in Türkiye's external buffers.

It noted that the Central Bank of the Republic of Türkiye's monetary tightening has led to the Turkish lira's real appreciation, which is important for the country's disinflation strategy.

"Fitch has greater confidence that the maintenance of a tight monetary policy stance, with an easing cycle starting in early 2025, combined with projected fiscal consolidation and prudent minimum wage adjustments will support a significant decline in inflation, and help maintain improved external liquidity buffers, low current account deficits and reduced dollarisation," said the statement.

- Lower current account deficits expected

After more than halving to 1.9% of GDP in 2024 annually, Fitch expects Türkiye's current account deficit to remain low, averaging 1.7% in 2025-2026.

"This is due to a tight policy mix, improved export demand derived from the recovery in the eurozone, continued growth in tourism receipts and lower gold and consumer imports," said the statement.

Fitch expects the government deficit to ease slightly to 5% of GDP this year, down from 5.2% in 2023, and later decline significantly to 3.1% of GDP next year, and further to 2.8% in 2026.

The government debt is estimated to fall to 27.3% of GDP in 2024, down from 29.6% last year.

The agency forecasts Turkish economic growth slowing to 3.5% this year and 2.8% in 2025, as it expects the continuation of a tight monetary policy stance combined with significant fiscal consolidation and minimum wage increase, with the objective of reducing inflation that will continue cooling domestic demand.