04.02.2025 15:31
Fitch Ratings Senior Director Erich Arispe Morales stated, "The decline in inflation continues, and we expect it to decrease further. We predict that the inflation rate for Turkey will be 23% by the end of this year and 18% by the end of 2026."
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Fitch Ratings Senior Director Erich Arispe Morales commented on the decision after Fitch Ratings confirmed Turkey's credit rating as "BB-" and the outlook as "stable," sharing his assessments regarding the decision and his expectations for the economy.
Morales expressed that the reduction in Turkey's current account deficit and the strengthening of international reserves continue. He stated that the ongoing decrease in currency-protected deposits and the expected inflation rate of 44.4% by the end of 2024 largely align with the revised targets of the Central Bank of the Republic of Turkey (CBRT) and Fitch's previous expectations.
"WE EXPECT INFLATION TO FALL EVEN FURTHER"
Morales noted that the high level of inflation continues to be a fundamental policy challenge for Turkey, and for this reason, they decided to maintain Turkey's rating outlook as "stable" in their assessments last week.
Pointing out that countries with the same credit rating as Turkey have lower inflation rates, Morales stated: "Inflation risks are one of the main factors affecting our assessment. However, the decline in inflation continues, and we expect it to fall further. We predict that the year-end inflation for Turkey will be 23%, and by the end of 2026, it will be at 18%. We anticipate that the CBRT's policy interest rate will decrease to 28% by the end of this year and to 21% by the end of 2026. This reflects a commitment to maintaining a tight monetary policy stance even in a loosening cycle. Additionally, it should be noted that financing and monetary conditions are supported by macroprudential tools in a way that is consistent with the disinflation process.
TWO FACTORS THAT FITCH WILL MONITOR FOR THE SECOND ASSESSMENT OF THE YEAR
Morales indicated that another important factor for Turkey this year is to monitor the extent to which expectations for improvement in policy consistency are realized.
He mentioned that the easing cycle initiated by the Central Bank last December is expected to continue this year, stating, "Additionally, we have seen a moderate minimum wage increase for this year. This is also consistent with the Central Bank's efforts to reduce inflation. The Ministry of Treasury and Finance supports these efforts with its commitment to reduce the budget deficit. The main issue is whether these policies will come together to reduce inflation."
Morales expressed that despite the easing cycle in monetary policy, they maintain the view that the Central Bank will continue its tight monetary policy stance.
"THE REDUCTION OF THE BUDGET DEFICIT WILL SUPPORT THE DECLINE IN INFLATION"
Stating that inflation cannot be reduced solely through monetary policy, Morales continued: "All policies must be in harmony. Additionally, the commitment to reduce the budget deficit from 4.8% of Gross Domestic Product to 3% will also support the disinflation process. Our expectation is that these policies will help reduce inflation. Considering the main challenges Turkey faces, we conclude that we need to increase our confidence that inflation will reach similar levels to other countries with the same credit rating. A development in this direction could positively affect our credit rating and outlook assessment for Turkey."
Another important factor is the strengthening of Turkey's foreign reserves and the continuous decrease in external financing needs. The improvement in international reserves last year was unexpectedly surprising in terms of the level and composition of reserves. However, it is important to further strengthen foreign reserves. In this context, we will focus on two main areas for a future rating and outlook decision. The first is the disinflation process, and the second is the consistent alignment of monetary, fiscal, and income policies with inflation control.
EXPECTATION OF INCREASE IN PORTFOLIO INVESTMENTS
Morales explained that they expect an increase in portfolio investments as Turkey continues its current policies.
However, he noted that direct foreign investment (FDI) processes are somewhat more complex, stating, "While the macro environment plays an important role, broader factors such as institutional concerns also affect investment decisions. FDI requires a long-term commitment, and it may take time for investors to gain confidence."
Regarding Turkey's return to an "investment grade" rating, Morales stated that reducing inflation will be crucial in this process.
He mentioned that reaching an investment grade may take time, saying, "While reducing inflation, it is essential to ensure investor confidence in the predictability of Turkey's policies. Consistently maintaining macroeconomic stability is ultimately the key factor in achieving an investment grade. Strong policies and institutional strength are critical to reaching this goal."
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