S&P assessment on fund investigation

International credit rating agency S&P Global Ratings has announced that developments regarding the liquidation process of certain funds in Turkey are not expected to create downward pressure on the country's credit rating.

S&P is expected to publish its second credit rating and outlook assessment for Turkey this year on October 16. In its last assessment in April, the agency affirmed Turkey's credit rating at "BB-/B" and maintained its outlook as "stable."

Karen Vartapetov, Director and Lead Analyst for Sovereign Ratings in Central and Eastern Europe and the Commonwealth of Independent States at S&P Global Ratings, refrained from providing details regarding the upcoming rating decision. Vartapetov described the regulatory measures and policy response taken by authorities within the scope of the fund process as "swift and convincing."

According to Vartapetov, the process appears to be under control at this stage, and no significant negative impact spreading to the broader financial system has been observed. It was noted that no significant reaction has been seen in areas closely monitored in credit assessments, such as exchange rates, dollarization, financial conditions, and the liquidity of the banking sector.

TO BE DISCUSSED BY THE CREDIT RATING COMMITTEE

Vartapetov stated that they do not expect downward pressure on Turkey's credit rating if the developments regarding the funds remain isolated. However, emphasizing that the issue will certainly be evaluated by the credit rating committee, Vartapetov stated that the process could be brought to the agenda as a risk factor.

The S&P official expressed that they do not expect the fund process to create a significant shift in investor sentiment if it remains limited to a narrow asset class. It was noted that maintaining household confidence in the lira and lira-denominated assets is critical for keeping negative effects limited.

Also evaluating the Turkish economy, Vartapetov stated that they expect average inflation to be around 30 percent this year and economic growth to be close to 3 percent. Stating that reserve adequacy is one of the key indicators for the country's credit rating, Vartapetov expressed that the recovery in reserves is supportive of the rating.

Vartapetov said that despite geopolitical developments in the Middle East, high energy prices, and the fund process, the household attitude toward the lira has remained strong. It was also reported that there is no clear sign of a resurgence in dollarization within the financial system.

Regina Argenio, Director of Financial Institutions at S&P Global Ratings, stated that the most significant impact of the fund process was seen in the stock market, with a decline in stock valuations, but that valuations stabilized after the initial correction.

Argenio noted that they did not observe major movements in data regarding the liquidity of the banking sector. Pointing to the importance of the process remaining limited to the relevant funds, Argenio said that the policy response provided to date has been "quite strong," noting that in addition to judicial processes, liquidity has been provided to the market and banks have been tasked with the liquidation of the funds.