Rating action

Scope Ratings GmbH (Scope) has today affirmed Türkiye's foreign-currency long-term issuer and senior unsecured debt ratings of B-. Türkiye’s long-term issuer and senior unsecured debt ratings in local currency are affirmed at B. The Outlooks on Türkiye’s long-term ratings in both foreign and local currency have been revised to Positive from Stable. The short-term issuer ratings have been affirmed at S-4 in foreign and local currency, with Stable Outlooks.

The revision of the Outlooks to Positive on Türkiye’s long-term ratings reflects the sustained policy shift initiated after the general elections of May 2023. The Central Bank of the Republic Türkiye (CBRT) has demonstrated effective inflation targeting, reducing the risk of policy reversal. Türkiye’s implementation of a more restrictive monetary policy, coupled with improved budget discipline, supports the gradual rebalancing of the economy, and reduces the likelihood of balance-of-payments and/or financial crisis.

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Key rating drivers

A durably more restrictive policy stance. The first driver of the outlook change reflects Türkiye’s adoption of a more consistent policymaking, which was initiated after the general elections of May 2023 and continued throughout the local elections of March 2024. The CBRT raised its rate to 50% for 1-week repos from 8.5% since May 2023, including a 500 basis-points shortly ahead of local elections¹. Higher than expected policy rate hikes demonstrate effective monetary policy tightening and the CBRT’s commitment to establish a disinflationary course as soon as possible^2,3.

Türkiye’s consistent implementation of orthodox monetary policy has demonstrated effective inflation targeting and reduced the risk of reversal. The sustained normalisation process will further enhance the credibility, independence, and effectiveness of the CBRT and anchor consumer inflation expectations, standing at 35.2% in April 2024 for the next 12 months⁴. The decline of average annual inflation, from a projected 60% in 2024 to 25% in 2025, is expected to be driven by interest-rate hikes and favourable base effects. Durably higher policy rate and the reduction of annual inflation should enable the real policy rate to return into positive territory. However, downside risks relate to the depreciation of the lira, the premature easing of monetary policy, and the reintroduction of fiscal stimulus.

Furthermore, budget projections indicate continued fiscal discipline. The widening of the central government deficit to 5.5% of GDP in 2024, from 5.2% in 2023, is expected to be temporary, with a primary balance projected for 2026, as reconstruction spending related to the February 2023 earthquake fades. In the longer run, the central government deficit is projected to stabilise around 3% of GDP by 2028. General government debt is projected to increase moderately to 31% in 2024, up from 29% in 2023, which reflects primarily the exposure to higher domestic interest rates, with 28% of central government debt issued with floating rates, and to exchange rate depreciation, with 64% of debt denominated in foreign currency. General government debt is projected to hover at 33% of GDP by the end of the forecast horizon.

Progressive rebalancing of the economy. The second driver of the outlook change reflects the gradual rebalancing of the economy that lowers the likelihood of balance-of-payments and/or financial crisis. Under a best-case scenario, the CBRT will complete the tightening cycle by maintaining policy rate at their peak for a prolonged period. This should enable the domestic economic activity to be increasingly led by investment and exports rather than private consumption that was the main growth driver between 2021 and 2023. Real GDP growth is projected to slow down to 3.2% in 2024, from 4.5% in 2023, as high inflation weighs on consumer demand. Selective credit and quantitative tightening lowered credit growth, from 79% on average in Q2 2023 to 46% in Q1 2024. In 2025, real GDP growth is expected to moderately rebound to 3.3%, below the government’s projection of 4.5% and the 5% recorded over the past 10 years on average.

Türkiye’s economic slowdown should moderate external gross financing needs thanks to a lower current account deficit, projected at 3.1% in 2024 and 2.6% in 2025, down from 4.1% of GDP in 2023⁵. Moreover, a more restrictive policy stance should facilitate the funding of external gross financing needs, as higher domestic rates support foreign currency inflows and boost confidence into lira denominated assets. Foreign currency-protected deposits continuously declined since August 2023, reflecting a lower dollarisation of the economy.

Rating challenges: persistent external and financial vulnerabilities. Türkiye’s long-term ratings are constrained by high external debt (USD 500bn, or about 45% of GDP) and the uncertainties related to the evolution of external buffers. The CBRT’s net foreign assets, after adjusting for foreign currency swaps, remains significantly negative (USD 55bn as of early April 2024, down from USD 42bn as of end-2023). The negative net foreign assets of the CBRT underscore its high dependence on sustained forex supply and the roll-over of foreign-currency swap arrangements with the banking sector. Achieving a sustained increase in Türkiye’s net foreign assets is likely to be contingent upon the initiation of the disinflation process.

Outlook and rating sensitivities

The Positive Outlook reflects Scope’s view that risks to the ratings are titled to the upside over the coming 12 to 18 months.

Upside scenarios for the ratings and Outlooks are (individually or collectively):

1. Current policy normalisation is continued in a consistent manner, durably enhancing the predictability and effectiveness of macro-economic policymaking, and raising the prospects for a sustained decline in inflation;
    
2. External vulnerabilities are reduced, due, for example, to a narrowing of current account deficits, an increase in capital inflows, and higher international reserves;

Downside scenarios for the ratings and Outlooks are (individually or collectively):

1. Failure to maintain a restrictive monetary policy stance and fiscal discipline threatens the disinflation process and the gradual rebalancing of the economy;
    
2. External vulnerabilities increase significantly, due, for example, to a sharp decline in international reserves, increasing the likelihood of balance-of-payments and/or financial crisis;
    
3. Severe domestic political pressure and/or an acute deterioration in security conditions and international relations adversely impact the economy;

Sovereign Quantitative Model (SQM) and Qualitative Scorecard (QS)

Scope’s SQM, which assesses core sovereign credit fundamentals, signals a first indicative credit rating of ‘bbb+’ for Türkiye. Under Scope’s methodology, the indicative rating receives 1) no positive adjustment from the methodological reserve-currency adjustment; and 2) two-notch negative adjustment from the methodological political-risk quantitative adjustment. On this basis, a final SQM quantitative rating of ‘bbb-’ is reviewed by the Qualitative Scorecard (QS) and can be changed by up to three notches depending on the size of the Türkiye’s qualitative credit strengths or weaknesses compared against a peer group of sovereign states.

Scope has not identified QS relative credit strength for Türkiye. Conversely, the following credit weaknesses have been identified in the QS: i) macro-economic stability and sustainability; ii) long-term debt trajectory; iii) debt profile and market access; iv) current account resilience; v) external debt structure; vi) resilience to short-term external shocks; vii) financial sector oversight and governance; viii) financial imbalances; ix) environmental factors; and x) governance factors.

On aggregate, the QS generates a three-notch negative adjustment for Türkiye’s credit ratings. An extraordinary two-notch downside adjustment is applied across foreign- and local-currency long-term ratings to account for years of significant weaknesses in macro-financial management and lower albeit still high economic imbalances. A further one-notch downside adjustment is applied for foreign-currency issuer and senior unsecured long-term ratings to account for lower albeit still high balance-of-payments risks. Together these adjustments indicate final B- / B long-term foreign- and local-currency ratings for Türkiye.

A rating committee has discussed and confirmed these results.

Environment, social and governance (ESG) factors

Scope explicitly factors in ESG issues in its ratings process vis-à-vis the sovereign-rating methodology’s stand-alone ESG sovereign-risk pillar, which holds a significant 25% weighting under the quantitative model (SQM) and 20% weight under the methodology’s qualitative overlay (QS).

Environmental factors are explicitly considered in the ratings process via an environment sub-category of the ESG sovereign risk pillar. Türkiye’s exposure to natural disasters is considered high as the country is exposed to earthquakes and landslides. Although Türkiye issued its first green bond in April 2023, the country faces deep challenges on natural resources protection and climate change mitigation. This drives Scope’s ‘weak’ qualitative assessment.

Socially related factors are captured under the sovereign methodology in the SQM via accounting for the economy’s comparatively low rate of labour force participation and a comparatively high level of income inequality. Although the unemployment rate is high, the old-age dependency ratio compares favourably against that of indicative peers, and demographic growth is positive. Together with the reduction of absolute poverty and the improvement of education, this supports Scope’s ‘neutral’ qualitative assessment.

Under governance-related factors, Türkiye scores weakly relative to rating peers according to the World Bank’s Worldwide Governance Indicators under the SQM. Performance on voice and accountability, rule of law, control of corruption, regulatory quality, and government effectiveness having declined over the last decade. Although local elections of March 2024 have demonstrated institutional strength, this supports Scope’s ‘weak’ qualitative assessment.

Rating committee
The main points discussed by the rating committee were: i) domestic economic risk; ii) public finance risk; iii) external economic risk; iv) financial stability risk; v) ESG-related risk; and vi) rating peers.

Rating driver references
1. Central Bank of the Republic of Türkiye, Press Release on Interest Rates, 21 March 2024
2. Central Bank of the Republic of Türkiye, Briefing on 2024-I Inflation Report, 8 February 2024
3. Central Bank of the Republic of Türkiye, Inflation Report, 2024-I Inflation Report, 8 February 2024
4. Republic of Türkiye, Ministry of Treasury and Finance, Turkish economy, 15 April 2024
5. Republic of Türkiye, The Medium Term Program (2024-2026), September 2023

Methodology
The methodology used for these Credit Ratings and/or Outlooks (Sovereign Rating Methodology, 29 January 2024) is available on https://scoperatings.com/governance-and-policies/rating-governance/methodologies.
The model used for these Credit Ratings and/or Outlooks is (Sovereign Quantitative Model Version 3.0), available in Scope Ratings’ list of models, published under https://scoperatings.com/governance-and-policies/rating-governance/methodologies.
Information on the meaning of each Credit Rating category, including definitions of default, recoveries, Outlooks and Under Review, can be viewed in ‘Rating Definitions – Credit Ratings, Ancillary and Other Services’, published on https://www.scoperatings.com/governance-and-policies/rating-governance/definitions-and-scales. Historical default rates of the entities rated by Scope Ratings can be viewed in the Credit Rating performance report at https://scoperatings.com/governance-and-policies/regulatory/eu-regulation. Also refer to the central platform (CEREP) of the European Securities and Markets Authority (ESMA): http://cerep.esma.europa.eu/cerep-web/statistics/defaults.xhtml. A comprehensive clarification of Scope Ratings’ definitions of default and Credit Rating notations can be found at https://www.scoperatings.com/governance-and-policies/rating-governance/definitions-and-scales. Guidance and information on how environmental, social or governance factors (ESG factors) are incorporated into the Credit Rating can be found in the respective sections of the methodologies or guidance documents provided on https://scoperatings.com/governance-and-policies/rating-governance/methodologies.
The Outlook indicates the most likely direction of the Credit Ratings if the Credit Ratings were to change within the next 12 to 18 months.

Solicitation, key sources and quality of information
The Credit Ratings were not requested by the Rated Entity or its Related Third Parties. The Credit Rating process was conducted:
With Rated Entity or Related Third Party Participation    NO
With access to Internal Documents                                NO
With access to Management                                         NO
The following substantially material sources of information were used to prepare the Credit Ratings: public domain.
Scope Ratings considers the quality of information available to Scope Ratings on the Rated Entity or instrument to be satisfactory. The information and data supporting these Credit Ratings originate from sources Scope Ratings considers to be reliable and accurate. Scope Ratings does not, however, independently verify the reliability and accuracy of the information and data.
Prior to the issuance of the Credit Rating action, the Rated Entity was given the opportunity to review the Credit Ratings and/or Outlooks and the principal grounds on which the Credit Ratings and/or Outlooks are based. Following that review, the Credit Ratings and/or Outlooks were not amended before being issued.

Regulatory disclosures
These Credit Ratings and/or Outlooks are issued by Scope Ratings GmbH, Lennéstraße 5, D-10785 Berlin, Tel +49 30 27891-0. The Credit Ratings and/or Outlooks are UK-endorsed.
Lead analyst: Thomas Gillet, Director
Person responsible for approval of the Credit Ratings: Giacomo Barisone, Managing Director
The Credit Ratings/Outlooks were first released by Scope Ratings in January 2003. The Credit Ratings/Outlooks were last updated on 12 January 2024.
As a "sovereign rating" (as defined in EU CRA Regulation 1060/2009 "EU CRA Regulation"), the ratings of Türkiye are subject to certain publication restrictions set out in Art 8a of the EU CRA Regulation, including publication in accordance with a pre-established calendar (see "Publication Calendar: Sovereign, Sub-Sovereign and Supranational Ratings" published on 19 February 2024 on www.scoperatings.com). Under the EU CRA Regulation, deviations from the announced calendar are allowed only in limited circumstances and must be accompanied by a detailed explanation of the reasons for deviation. In this case, the deviation was due to recent policy actions taken by the Central Bank of the Republic of Türkiye and their implications for the rating trajectory. This event has prompted publication of this credit rating action on a date deviating from previously scheduled release dates per Scope’s sovereign release calendar.
 
Potential conflicts
See www.scoperatings.com under Governance & Policies/Regulatory for a list of potential conflicts of interest disclosures related to the issuance of Credit Ratings.

Conditions of use / exclusion of liability
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