S&P revises Turkey's credit rating outlook from stable to positive: Our credit rating has not changed yet

The detail we must not forget is that our credit rating has not changed yet and we are still below the investment threshold. Our prescription for a rating upgrade is as follows: "If the current account deficit falls faster, dollarization decreases, and foreign exchange reserves strengthen, we will increase the rating by 1 notch."

In summary, if the new era, which began with rationalization steps taken regarding interest rates and the KKM (FX-protected deposit scheme), continues, capital inflows to the country may begin, and this could be the expected move for a long-term rally in the stock market.

A “POSITIVE” OUTLOOK IN EVERY SENSE

Standard & Poor’s has upgraded Turkey's credit rating outlook from “stable” to “positive” and at the same time affirmed its “B” long-term and local currency foreign currency credit rating. It was stated that the progress made by the Central Bank of Turkey (TCMB) in increasing foreign currency reserves and the increase in local currency savings are helping to reduce double-digit current account deficits. 

In the statement made by S&P, it was noted: “We also raised our transfer and convertibility assessment to “B+” from “B”, which indicates that the risk of the government preventing private sector borrowers from repaying their foreign currency debts has decreased.”

It can be stated that measures such as the TCMB increasing interest rates by 31.5% since June and the interest rates on local currency savings products exceeding the interest rates on foreign currency savings products by nearly 40 points have contributed to this development.

SERIOUS STEPS HAVE BEEN TAKEN

In the post-election period, Turkey's new economic team has taken a series of steps to restore confidence in Turkish Lira assets, rebalance the economy, and ease the regulatory burden on the financial sector. As a result of these efforts, an economic rebalancing process has begun in Turkey. In the report, S&P specifically noted that the TCMB has slowed the pace of currency depreciation by increasing the policy rate by a total of 3150 basis points, but has not yet stopped it completely. 

Furthermore, the report states that some recently released data, such as weakening consumption (retail sales and imports) since the beginning of the third quarter, show that the Turkish economy is “both slowing down and rebalancing.” 

Stating, “We expect GDP growth to slow from 3.7% to 2.4% in 2024,” S&P anticipates that investments will be supported primarily by earthquake-related expenditures. The report also estimates that labor demand will soften somewhat and unemployment will peak at over 11% by 2026. 

Emphasizing that Turkey's new economic team has “taken serious steps to rebuild confidence in Turkish Lira assets, rebalance the economy, and manage the burden on the financial sector,” the report stated that the monetary tightening steps taken since September have cooled domestic demand (including automobiles and durable consumer goods), leading to a decline in imports.

“IT MAY TAKE AT LEAST 2 YEARS TO BRING UNDER CONTROL”

The report also stated that it will take at least two years for Turkey's fiscal policy adjustment to bring inflation under control. Thanks to the additional tax measures and spending restrictions implemented in July 2023, the general government budget deficit is expected to be fixed at 4.3% of GDP.

“Although inflation is at a high level of 60%, it seems to have peaked,” the report says, noting that Turkey has begun to rebuild its usable reserves. As you may recall, in the first half of November, these reserves increased by approximately 5.5 billion dollars to 27.5 billion dollars, which is still a moderate figure. 

Within the scope of the report, Turkey's broader institutional arrangements were found to be weak, and this was evaluated as a limiting factor on the country's credit ratings. It was stated that after the 2017 constitutional referendum, decision-making processes were largely concentrated in the executive branch, which increased uncertainty in economic decision-making processes and that the independence of key economic institutions such as the TCMB needs to be confirmed.

The report also included warnings that before the local elections to be held in 2024, decision-makers “could interrupt or reverse the steps taken recently, especially those aimed at tightening monetary policy.”

WE ARE JUST STARTING!

On the other hand, the report underlines that the economic rebalancing process has just begun and is subject to risks; as an example of these risks, the local elections that will take place at the end of March 2024 stand out, and it is stated that policy changes may be seen as this period approaches.

“Alternatively, the economy could slow down rapidly, a financing gap could emerge, and the current account deficit could widen even further. This could occur in a scenario of currency depreciation and has the potential to affect fiscal performance,” the report says, while also emphasizing that this could mean faster deleveraging and larger increases in foreign exchange reserves:

“Our baseline expectation lies in the middle of these two scenarios. We estimate that Turkey's new economic team will further tighten credit conditions, the economy will avoid a recession, and the current account will post a surplus in the 3%-4% range of GDP. Half of this current account surplus is expected to come from equity inflows (including foreign direct investments), and the remaining half from net debt inflows (including the return to the country of some private sector liquid assets currently held abroad). We project that usable reserves will rise above the 2018 year-end level of 60 billion dollars by 2025.” 

Stating that Turkey's fiscal stance is generally not as expansionary as previous forecasts, the report also includes the expectation that general government deficits will narrow toward 3.5% of GDP by 2025. However, it is also emphasized at this point that there may be risks arising from the potential burdens of earthquake-related expenditures and fiscal loosening that may be seen before the elections. 

In the report, which predicts that government debt will increase over the next three years but that this increase will remain at a moderate level, it was stated: “We estimate that net general government debt will rise from 26% at the end of 2022 to slightly over 31% of GDP in 2026. This partly reflects currency depreciation, given the high share of foreign currency-denominated debt in total government debt.”

On the other hand, it is estimated that interest expenditures will be affected by both exchange rate effects and the increase in domestic borrowing costs, rising from 8.5% in 2022 to 11.5% in 2026. 

Stating that the currently high financial stability risks have begun to ease, S&P, on the other hand, thinks that these risks could create contingent liability risks for the government if it has to bail out a bank due to a loss of confidence by domestic depositors:

“We believe that in the event of a loss of confidence in the banking sector, the government could be called upon to contribute much higher amounts of capital and credit to banks.”

News Source: 12punto