Moody’s upgrades Turkey’s credit rating by two notches

Erhan Demirtas/NurPhoto via Reuters Connect

• Upgrade in ratings from B3 to B1
• Positive outlook based on policy changes
• Country remains below investment grade

Turkey’s efforts to improve its economic credentials and attract investment have been given a boost by the credit ratings agency Moody’s, after what the agency said was a return to a more balanced economic policy programme. 

In a statement on July 19, Moody’s said it had upgraded Turkey’s long-term foreign and domestic currency issuer and foreign currency senior unsecured ratings by two notches to “B1″, up from “B3″.

However this is still four levels below investment grade, the level that allows many international funds to invest in a country.

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Moody’s said it was maintaining its “positive” outlook, having upgraded its position on Turkey from “stable” in January.

But Turkey’s ratings are still now only on a par with countries such as Jordan and Bangladesh. 

Moody’s said the rating could be improved further if there was a sustained reduction in inflation, a lasting de-dollarisation, or return of confidence in the Turkish lira, and a stronger current account position. 

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It added that it was upgrading because of the first visible results from the Turkish government’s efforts to reduce major macroeconomic imbalances through a return to orthodox monetary policies. 

This included the central bank adopting policies aimed at restoring confidence in the Turkish lira and combating inflation, the agency said.

Currently, the central bank’s main policy interest rate stands at 50 percent, part of a broader state programme to slow demand in the economy, along with government-imposed austerity measures such as scaling back spending on infrastructure development and imposing a freeze on new public service hirings. 

Moody’s upgrade comes after a similar move by its fellow ratings agency S&P, which raised its assessment of Turkey from “B” to “B+” on May 3, pointing to improved coordination between monetary, fiscal and income policy. 

Analysts said that the markets were expecting an upgrade because of improved economic indicators and recent better than projected inflation data.

Hande Eğilmez Eniş, sales unit and corporate communications manager for the Istanbul-based investment firm Dinamik Yatırım, said that market speculation had centred on whether the ratings would go up by one or two notches.

“Moody’s increasing Turkey’s rating will most likely have a positive impact on the credit default swaps, bonds and foreign currency,” she told AGBI. “But on the stock exchange the ratings upgrade has already been factored in.”

The Istanbul stock exchange has tested historic highs recently ,and while there might be another peak the markets will take its gains following that, Eniş said. 

Marked improvement

There has been some improvement in these criteria recently, with Turkey’s current account deficit narrowing in the first five months of the year to $17.6 billion, from $32.4 billion in the January to May period in 2023, while inflation is tipped to fall below 70 percent in July, down from the June figure of 71.6 percent. 

Dollarisation, though still high, has decreased, with up to 60 percent of private bank deposits now in lira, according to central bank data. 

However the Moody’s report also carried a warning for Ankara. 

A shift away from efforts to remove economic imbalances, such as a push for strong credit growth, further large wage increases, or failure to curb high government spending that would prolong the period of steep inflation, would be seen as credit negative and potentially downgrade Turkey’s outlook, Moody's said.