Fitch warns Turkey: Inflation is fragile, external financing needs are high

Fitch Ratings has affirmed Turkey's credit rating at 'BB-' with a stable outlook, but its accompanying report underscores the fragility of the nation's economic position. While acknowledging Turkey's resilience to global and geopolitical shocks, the international credit rating agency emphasized that a potential upgrade hinges on the lasting improvement of international reserves and the consistent maintenance of a tight monetary policy.

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International reserves have recovered, but still remain below pre-war levels.

Senior Director Erich Arispe Morales highlighted that although international reserves have recovered somewhat after a depletion following the US/Israel-Iran conflict, they remain below pre-war levels. This situation, coupled with ongoing geopolitical uncertainties that exert inflationary pressures on emerging markets, makes Turkey's relatively high external financing needs a critical vulnerability. Morales stressed that the improvement in reserves must be permanent, not temporary, to reduce this fragility.

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The improvement in reserves must be permanent, not temporary, to reduce fragility.

Regarding inflation, Fitch noted that despite showing signs of easing, it remains at a high level. The agency pointed to policy credibility as a key factor. While positive elements include the preservation of inflation expectations and a stable dollarization rate around 38%, significant risks persist. Morales cautioned that reducing inflation from its current level above 30% will take time and the process is inherently fragile.

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It needs to be taken into account that the slowdown of inflation above 30% may take some time.

Fitch also commented on Turkey's monetary policy, anticipating a gradual easing by the Central Bank. Assuming reduced geopolitical risks and easing energy prices, Fitch projects the Central Bank will implement a total of 200 basis points in rate cuts, bringing the policy rate to 35% by the end of 2026. The agency recognized the banking sector's robust structure and access to external financing as strengths that bolster Turkey's resilience against external shocks.

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Our forecast is that the Central Bank will make a total of 200 basis points in reductions, bringing the policy rate to 35% at the end of 2026.