Moody’s upgrades rating outlook on Turkey to positive

Moody’s upgrades rating outlook on Turkey to positive
Levent business and financial district in Istanbul. / Derrick Brutel, cc-by-sa 2.0
By Akin Nazli in Belgrade January 13, 2024

Moody’s Investors Service has upgraded its outlook on Turkey’s sovereign credit ratings from stable to positive. The rating agency announced the move on January 12 in a scheduled rating review.

Turkey currently has a B/Stable rating, five notches below investment grade, from Fitch Ratings, a B3/Positive, six notches below investment grade, from Moody’s Investors Service and a B/Positive, five notches below investment grade, from S&P Global Ratings.

In December and September, S&P delivered two Turkey outlook upgrades.

More upgrades will follow should Turkey’s monetary "normalisation" policy (see bne IntelliNews' Turkey Outlook 2024) remain in effect.

The main driver of the outlook change to positive was the decisive change in Turkish economic policy, Moody’s noted in its statement.

The affirmation of the B3 ratings reflects the large accumulated imbalances in the Turkish economy which will take time and policy consistency to be unwound.

It also reflects a track record of institutional weakening over many years, which the change in policy stance during 2023 does not yet erase.

Turkey's FX reserves are still low while confidence in the local currency has not yet been fully restored, according to Moody’s.

As regards Turkey’s default history, Moody’s has recorded at least one default event on bonds and/or loans since 1983.

Moody's would likely upgrade Turkey’s ratings if the current monetary policy stance was maintained beyond the upcoming municipal elections at the end of March and through emerging evidence of a growth slowdown, raising confidence that inflation will start to slow in the second half of the year and that macroeconomic imbalances will be durably reduced.

Other positive indications that the new policy direction is yielding tangible results would include durably lower imports, in particular of consumer goods, and a further orderly switch to lira-denominated deposits.

Stability in the exchange rate combined with stronger capital inflows that would allow a faster-than-expected replenishment of the central bank's foreign-currency reserves would also be positive.

On the contrary, Moody's would return the outlook to stable if there were indications that the authorities were returning to the previous policy. A push for strong credit growth or further wage hikes could be such indications.