S&P's minimum wage hike forecast for Turkey

S&P Global Ratings Senior Director Frank Gill stated that they have upgraded Turkey's credit rating twice this year, saying, "This is a fairly high rating increase for a single year. It must be admitted that we started from a fairly low rating for a middle-income economy as diverse, open, and resilient as Turkey, but two rating upgrades this year is good news."

Regarding the expected hike in the minimum wage, Gill said, "Our expectation is that the minimum wage will likely be increased based on an average between the inflation target and the inflation at the end of last year and this year. We project inflation at approximately 44 percent by the end of this year. So, the average of 44 percent and the 17 percent target is approximately 30 percent."

"OUR EXPECTATION FOR THE MINIMUM WAGE HIKE IS 30 PERCENT"

Gill's statement is as follows:

"We are monitoring whether decisions regarding income policy will be closely coordinated with next year's inflation target within the scope of the Medium-Term Program. If the minimum wage increase is more in line with past inflation, questions may arise about how quickly they can reduce headline inflation. Our expectation is that the minimum wage will likely be increased based on an average between the inflation target and the inflation at the end of last year and this year.

We project inflation at approximately 44 percent by the end of this year. So, the average of 44 percent and the 17 percent target is approximately 30 percent.

This is obviously an important decision because the cost of living has increased significantly. This is not unique to Turkey, but I think the pressures in Turkey have been more intense than those in Europe and Eastern Europe. In this respect, we think that disinflation will take a long time."

"AN INITIAL AND CONSERVATIVE INTEREST RATE CUT MAY COME AT THE END OF THE FIRST QUARTER OF 2025"

Stating that they had previously projected that the Central Bank would start cutting the policy rate in November, Gill reported that they updated their forecast following the September inflation figures.

Gill expressed that the first interest rate cut could occur at the end of the first quarter of 2025, saying, "Given that we still project 2025 year-end inflation at around 22-23 percent, we think that the decline in interest rates will likely occur towards the end of the first quarter of 2025. The Central Bank will proceed with a fairly conservative interest rate cut. In our view, the policy rate will still be well above forward-looking inflation expectations, and they will monitor the exchange rate, reserve levels, and capital flows very carefully."

Stating that they project the Turkish economy to grow by 3.1 percent this year, Gill noted that growth will slow to 2.3 percent in 2025.

Gill assessed, "Considering population growth and the expected demand recovery in Turkey's key trading partners in Europe, negative growth would be very unusual. However, we cannot rule out the possibility of growth below 2 percent. If inflation does not fall, the Central Bank will need to maintain an even tighter policy stance."

Stating that growth will also depend on the minimum wage increase in December and changes in fiscal policy, Gill summarized the rating upgrade decision and their forward-looking expectations as follows:

"In conclusion, we have upgraded Turkey's rating twice this year. This is a fairly high rating increase for a single year. It must be admitted that we started from a fairly low rating for a middle-income economy as diverse, open, and resilient as Turkey, but two rating upgrades this year is good news.

On the other hand, in our view, reducing inflation to single-digit levels will require at least another three to five years. It may be difficult for any government to maintain and support tight monetary and fiscal policy for such a long period. Turkey is a democracy, and the government will be sensitive to the impact of the program on household confidence and the economy. Therefore, there is uncertainty about how the government can manage this over the next few years. I think many foreign investors have the same questions.

Turkey is an open economy where service exports are in very good shape. We think net exports will contribute to growth over the next two years. There will likely be weaker household spending, but this is not an accident. This is part of the plan because this is one of the ways the government will reduce inflation."

Gill also added that the process regarding the elections in the US is reflected in the markets and will affect capital inflows to many emerging economies, including Turkey.

S&P previously upgraded Turkey's credit rating from "B" to "B+" in May, while maintaining the credit rating outlook as "positive."