Moody's upgrades Türkiye's ratings to B1 from B3, maintains positive outlook

Moody's announced Friday it upgraded Türkiye's long-term foreign- and domestic-currency issuer and foreign-currency senior unsecured ratings to B1 from B3.

The global rating agency said the outlook remains positive.

"Concurrently, the foreign-currency backed senior unsecured rating of Hazine Mustesarligi Varlik Kiralama A.S. has also been upgraded to B1 from B3," with a stable outlook, it said in a statement.

The reasons for the upgrade were listed as improvements in governance, more specifically the decisive and increasingly well-established return to orthodox monetary policies, which are yielding the first visible results in terms of reducing the country's major macroeconomic imbalances, it said.

While inflation and domestic demand have started to moderate, inflationary pressures are expected to ease significantly in the coming months and into 2025, it added.

The Central Bank of Türkiye (CBRT) is rapidly enhancing the credibility of monetary policy, which in turn is helping to restore confidence in the Turkish lira, said the agency.

"Moreover, the tight policy stance is already materially reducing Turkiye's elevated external vulnerability," said the statement.

"The positive outlook reflects a balance of risks skewed to the upside," according to the rating agency.

As the credibility and effectiveness of monetary policy increases, macroeconomic stability and stronger institutions may allow Türkiye's underlying credit strengths, such as its diversified and competitive economy and comparatively strong fiscal and debt metrics, to come forward again, it said.

It would be realized especially if the shift in the conduct of macroeconomic policy is accompanied by structural changes that reduce the risk of long-lasting inflation shocks in the future, it added.

Moody's also raised Türkiye's local-currency country ceiling to Ba1 from Ba3.

"The three-notch gap between the local-currency ceiling and the sovereign rating reflects the prospect for a further reduction in external imbalances and improving monetary policy effectiveness, as well as a relatively limited government footprint in the economy," it said.

Türkiye's foreign-currency ceiling, meanwhile, has also been raised to Ba3 from B2.

"The two-notch gap between the foreign-currency and local-currency ceilings takes into account reduced external vulnerability risks," it explained.

Moody's, however, noted that the level of dollarization in Türkiye remains high and confidence in the Turkish lira has not yet been fully restored.

On the other hand, the central bank's sharp monetary tightening has restored confidence in and attractiveness of the Turkish lira, which can be seen in the increase in lira deposits, as deposit rates averaging close to 60% currently, it said.

The agency expects consumer inflation to sharply decrease to below 45% by December, helped by the slowdown in domestic demand that is currently underway and with appreciation in the real exchange rate.

Moody's expects Türkiye's current-account deficit to stand at a manageable 2.4% of GDP in 2024 and below 2% of GDP in 2025, down from 5% in 2022.

"While Turkiye's headline external financing needs remain at elevated levels of over 20% of GDP, more than half is financed via stable funding sources, in particular trade credit and deposits into both the CBRT and the banking system that have been resilient to repeated shocks," it explained.

The central bank's foreign-currency position has "materially improved in both gross and net terms," it said.

While the bank's reserves in hard currencies have increased to $86.9 billion as of July 12, "combined with gold reserves of over $59.4 billion, reserves now stand at the highest level for more than a decade," it added.

Moody's said Türkiye returning to relatively low budget deficits will in turn help it to stabilize the public debt at around 30% of GDP, which would be a low level compared to most emerging market countries if achieved.

It said Türkiye's rating could be upgraded if authorities manage to reduce inflation on a sustained basis and achieve lasting de-dollarization and a stronger current account position.

"We would be likely to consider such improvements to be long-lasting and sustainable, and therefore consistent with a higher rating, if they were to be accompanied by a structural reduction in Turkiye's dependence on energy imports," it said.

Türkiye's outlook could be returned to stable if the improvements in disinflation, de-dollarization and current account deficit are not accompanied by structural changes, said Moody's.

"A push for strong credit growth, further large wage hikes or inability to reign in high government spending that would prolong the period of very high inflation and reduce the possibility of disinflation would be credit negative," it added.