S&P Global Ratings has revised its outlook on Turkey to stable from negative citing reforms refocusing on measures to reduce external vulnerabilities, the ratings agency said on November 4. At the same time S&P affirmed its unsolicited 'BB/B' foreign currency long- and short-term sovereign credit ratings and ‘BB+/B' local currency long- and short-term sovereign credit ratings on Turkey.

The outlook upgrade comes at a very crucial time for Turkey, when the country is facing heightened political tensions and geopolitical risks that are weighing on investor sentiment. Because of all these negative developments, the lira last week weakened to a record low, stocks fell, while bond yields rose as well as the country’s CDS. The upgrade could provide some relief and support the local currency.

S&P downgraded Turkey's ratings into junk status in the wake of the failed July 15 coup attempt. Moody’s reduced the country’s rating in September, leaving Fitch Ratings as the only major ratings agency to keep Turkey at investment grade. Fitch is expected to review its rating in early 2017.

The stable outlook reflects the balance between the resilience of the Turkish economy against lingering regional and domestic risks which, if  realised, could increase balance-of-payments pressures and widen currently moderate fiscal deficits, the rating company said in a statement. “Although we continue to consider that Turkey's high private sector external debt poses a risk to economic stability, we believe that government policy is gradually refocusing on measures to reduce external vulnerabilities, albeit in the presence of weaker growth and moribund private investment. We are therefore revising our outlook on Turkey to stable from negative,” S&P said.

S&P thinks that the state of emergency following the coup attempt is likely to remain in place until at least January 2017. “However, we factor our expectation of ongoing domestic political volatility--related to the constitutional reform process, the ending of the Kurdish peace process in mid-2015, and heightened instability along Turkey's southeastern border with Syria--into our ratings at the current level”, it noted.

The rating agency said it could lower its ratings if Turkey's fiscal performance and debt metrics deteriorate beyond its current expectations, if political uncertainty contributed to further weakening in the investment environment or tightening global policy rates intensified balance-of-payment pressures. “We could raise our ratings on Turkey if sustained rebalancing of the source of economic growth led to much lower external borrowing needs,” it added.