Moody’s Investors Service has upgraded its credit rating on Turkey by one notch to Ba3 from B1, the rating agency said on July 25 following a scheduled country review.

The outlook was updated to stable from positive.

Also on July 25, Fitch Ratings said that it has affirmed its Turkey ratings.

Turkey currently has a BB-/Stable rating (at three notches below investment grade) from Fitch Ratings, a Ba3/Stable (at three notches below investment grade) from Moody’s Investors Service and a BB-/Stable (at three notches below investment grade) from S&P Global Ratings.

All done for 2025

Thanks to its shift to orthodox policymaking in June 2023, Turkey enjoyed outlook upgrades in 2H23 that were followed by two notches of rating upgrades from all three agencies in 2024.

With Moody’s latest move, it seems all the rating reviews are done for 2025. Moody’s began one notch below the other two. Now, all three are on the same page.

For this year, Moody’s scheduled the release of its Turkey reviews for January 24 (skipped with no action) and July 25 (hiked one notch, assigned a stable outlook).

Fitch scheduled January 31 (rating affirmed) and July 25 (affirmed), while S&P circled April 25 on the planner (rating affirmed) and October 17. S&P is expected to skip its scheduled review in October with no action.

Eyes turn to outlook upgrades in 2026

Outlook upgrades will be expected in 2026 should Turkey’s positive real policy rate approach remain in effect.

Policy reversal risk to remain in coming years

The upgrade reflects Turkey's strengthening track record in effective policymaking, more specifically in the central bank's adherence to monetary policy, Moody’s noted in its press release on its rating action.

The upgrade also reflects Moody’s view that the risk of a policy reversal has receded, although the risk will remain present in the coming years.

Moody’s expects that Turkish authorities will continue to prioritise disinflation and restoring macroeconomic and financial stability.

Tested by domestic and external stress

This approach has been maintained without signs of political interference since the May 2023 national elections, including during the domestic political turbulence of recent months as well as in the face of global economic and financial market headwinds along with emerging social pressures related to the ongoing monetary policy adjustment.

The central bank's improving credibility has this year been underscored by its response to the pressure on the Turkish lira experienced during March and April following domestic political unrest and the announcement of US tariffs.

Reserves 25% below mid-March level

After a pronounced fall as a result of central bank interventions, the net foreign currency reserves started to rebuild, but they are still 25% lower than they were in mid-March, when Istanbul mayor and President Recep Tayyip Erdogan’s main political rival, Ekrem Imamoglu, was jailed.

Turkey’s inflation to remain an outlier

Moody’s projects Turkiye's annual inflation will fall to around 30% by end-2025 and to around 20% by end-2026.

Nevertheless, inflation and inflation expectations would even then remain well above the level seen before the 2021-2024 inflation shock phase and would also be higher than is seen with peers.

Moody’s expects GDP growth to slow to 2.2% in 2025 from 3.2% in 2024, remaining below potential growth estimates for the economy ranging from 3.5% to 4.5%.

Reserves net of swaps

While external pressures have declined significantly with the narrowing of the current account deficit and the favourable oil price backdrop, external vulnerability risks remain elevated as underscored during March-April this year when a large outflow of predominantly short-term foreign capital led to significant reserve losses at the central bank.

Despite a significant recovery achieved since early May, the central bank FX reserves net of swaps cover only around 30% of total outstanding short-term external debt, compared to 70-100% before 2018.

Weak in ESG

Turkey's environmental, social, governance (ESG) credit impact score of CIS-4 reflects an overall negative impact of ESG factors, still-weak governance in particular.

The country has moderate exposure to environmental risks (E-3) across a range of categories, such as water supply, natural capital, waste and pollution.

It is vulnerable to water stress and has experienced lower winter precipitation, which negatively impacts the quantity and quality of water in Turkey's rivers, an important source of drinking water, irrigation and power generation.

Carbon transition risks are also material and reflect a relatively high energy-mix share of coal and gas-fired energy generation, which could hinder Turkey's export competitiveness as major markets in particular in Europe adopt carbon border-adjustment mechanisms.

Institutions demolished

Exposure to social risks is similarly moderate (S-3). While Turkey's young population supports its demographic profile, youth unemployment is high, labour-force participation is low and employment informality is widespread.

High inflation has eroded living standards, adding to social risks. The overall provision of basic services such as safe drinking water and sanitation services to the population is uneven across the country and weaker than in many other OECD countries.

Governance risks remain a key risk to Turkey's credit profile (G-4), notwithstanding the decisive change in monetary policy. The quality of institutions weighs on overall governance.

Fitch on same page

Turkey's ratings reflect a record of high inflation and political interference in monetary policy, low external liquidity relative to high financing requirements and weaker governance compared with peers, Fitch said in its statement.

Set against these factors are its low government debt (excluding off-balance sheet public private partnership (PPP) projects), record of sustaining access to external financing, resilient banking sector and high (based on the Turkish statistical institute TUIK’s standards) GDP per capita relative to peers.

$49bn burnt through

Monetary policy tightening helped contain external pressures driven mainly by non-resident capital outflows triggered by the arrest of Imamoglu and the resulting public protests.

Measures taken by the central bank included lifting the policy interest rate by 350bp to 46% and FX interventions to stabilise the lira.

Net international reserves, excluding swaps, fell by $49bn to $14bn in early May compared to mid-March, before recovering to $41bn in early July.

$41bn is still $107bn above the record low in negative territory recorded in March 2024. 

The Erdogan risk

In Fitch’s view, Turkey’s monetary policy framework nevertheless remains a key ratings weakness, reflecting a lack of independence and the recent history of ultra-loose, unorthodox and destabilising policy that was likely influenced by Erdogan.

Fitch's base case is for policy to remain fairly tight through 2026, with a real policy interest rate of 7% at end-2025.

No easing mania before elections

Fitch anticipates easing ahead of presidential elections scheduled for May 2028 but not a return to highly negative real rates.

Highest inflation

Fitch forecasts Turkey’s official inflation will fall further to 28% at end-2025 and 21% at end-2026. These rates are still the highest of any sovereign Fitch rates.

The rating firm also forecasts that the current account deficit will widen by 0.4 percentage points to 1.2% of GDP in 2025.

Turkey's external debt (including trade credits) maturing over the next 12 months stood at $222bn at end-May. It remains high relative to the FX reserves.

Risk is mitigated by the resilience of sovereign and private sector access to external finance shown over an extended period.

Fitch expects the rollover rates of bank and corporate external debt, which stood at 115% and 157%, respectively, at end-May (on a six-month rolling basis), to remain robust.

Weaker governance

Turkey's governance ranking, as measured by World Bank indicators, continued to decline over the last decade, to the 32nd percentile, well below the BB median of the 44th percentile.

It reflects a moderate level of rights for participation in the political process, moderate but deteriorating institutional capacity due to increased centralisation of power in the office of the president and weakened checks and balances, the uneven application of the rule of law and a moderate level of corruption.

CHP out, Kurds in

A total of 18 main opposition Republican People's Party (CHP) mayors have been arrested on corruption charges since March. Also, the CHP party chair is being prosecuted. There is a risk that jailing another high-profile presidential rival could reignite public protests and market volatility.

The Kurdistan Workers' Party (PKK) announced in May that it plans to disband. The Assad government in Syria fell in December. These factors should reduce security risks and moderately improve international relations, particularly with the US.

Nevertheless, the volatile regional security environment and Turkey's active foreign policy continues to pose geopolitical challenges.

There is a possibility that reconciliation efforts open a path to a deal with DEM, the main Kurdish party, to help secure the 360 parliamentary seats needed in the event President Erdogan seeks an early election.

De-dollarisation

The share of FX-protected lira deposits fell sharply to $14bn (2.4% of total deposits) in June from $144bn (26.2%) in August 2023. 

The bank deposit dollarisation ratio also dropped to 38%, closer to the BB median of 33%, from a peak of 62% at end-2021.

Fitch forecasts that the general government deficit will narrow by nearly one percentage point to 4% of GDP in 2025.

It also projects that GDP growth will moderate to 2.9% in 2025.