Rating action

Scope Ratings GmbH (Scope) has today upgraded Türkiye's foreign-currency long-term issuer and senior unsecured debt ratings to BB-, from B. Türkiye’s long-term issuer and senior unsecured debt ratings in local currency have been upgraded to BB-, from B+. The Outlooks on Türkiye’s long-term ratings in both foreign and local currency have been revised to Stable, from Positive. The short-term issuer ratings have been upgraded to S-3, from S-4, in foreign and local currency, with Stable Outlooks.

The upgrade of Türkiye’s credit ratings reflects:

1. Effective monetary policy stance, prospects for a contractionary fiscal policy, and a moderate economic slowdown supporting a sustainable disinflation process. A record of enhanced macroeconomic policymaking, the commitment to maintain the current policy stance, and the improvement of coordination between monetary, fiscal and revenue policies increase the likelihood that inflation will continue to subside. The slowdown in private consumption and the rebalancing towards investment and net exports raise the prospects for stronger macroeconomic stability.
    
2. Sounder economic and financial management driving the replenishment of international reserves, easing pressure on the balance of payments and reducing financial stability risks. The moderate economic slowdown underpins the projected narrowing of the current account deficit and external gross financing needs, alongside the steady decline in external debt. Sustained disinflation and enhanced macroeconomic policymaking support foreign capital inflows and lira denominated assets, easing pressure on banks’ balance sheets.

The Stable Outlooks balance the prospects of an appropriate policy stance driving the gradual replenishment of international reserves and rebalancing of the economy with the downside risks stemming from high inflation relative to peers, external shocks, and lingering financial stability risks.

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Key rating drivers

Effective monetary policy stance, prospects for a contractionary fiscal policy, and a moderate economic slowdown support a sustainable disinflation process. The Central Bank of the Republic of Türkiye (CBRT) has pursued a restrictive monetary policy with the one-week repo rate maintained at 50% since March 2024¹. Following the peak of May 2024 (75.5%), inflation has declined for a sixth consecutive month to 47.1% in November 2024, down from 48.6% in October. The real policy rate, which turned positive in September 2024 for the first time since 2021, has remained in positive territory. The 12 months (24 months) consumer inflation expectations, which have been below 30% (20%) since August 2024, have continued to decline as the quantitative tightening and the simplification of financial regulations improved monetary policy transmission. Enhanced credibility, independence, and effectiveness of the monetary policy underpin the expectation that the CBRT will continue to target inflation that is projected to subside from 60% in 2024 to 35% in 2025^2,3.

Moreover, the prospects for a contractionary fiscal policy raise confidence in the disinflation process. Although the deficit has more than doubled between January and September 2024, the authorities are committed to strengthen fiscal discipline in 2025⁴. Proposed revenue enhancing measures include a domestic minimum corporate tax and a global minimum corporate tax for multinational corporations, limiting exemptions on corporate tax, as well as an income tax plan. In addition, stronger management of spending, such as on energy subsidies and transfers, public sector wages, earthquake-related expenditures, and capital expenditures should also consolidate public finances. Further adjustment of the minimum wage is likely following the 49% hike of January 2024, but the authorities are committed to moderate income policies. On that basis, Scope projects the central government deficit to narrow from 5.1% of GDP in 2024 to 3.5% in 2025. From 2026 onwards, a primary balance should support the projected stabilisation of the general government debt-to-GDP ratio at around 25% by 2029, which is low relative to rating peers.

Finally, the moderate economic slowdown further supports the disinflation process. Following the decline in real GDP growth from 5.3% YoY in Q1 2024 to 2.4% in Q2 and 2.1% in Q3, the tight policy mix underpins a real GDP growth projected at 3.0% in 2025, after 3.0% in 2024, down from 5.1% in 2023 and below an average of more than 5.0% between 2013 and 2023. Tight financial conditions and lower real wage growth drive the slowdown in private consumption and the rebalancing towards investment and net exports. The labour market remains robust with the unemployment rate declining to 8.6% in September 2024. In the longer run, structural and supply side reforms are expected to support productivity and competitiveness, raising the prospects for stronger macroeconomic stability, with annual growth estimated between 3.5% to 4.0%.

Sounder economic and financial management should drive gradual economic rebalancing, easing pressure on the balance of payments and reducing financial stability risks. The current account deficit is expected to narrow from 4.0% of GDP in 2023 to less than 2.0% on average in 2024 and 2025⁵ as the restrictive policy mix weighs on consumption and investment, while lower inflation supports domestic savings. The cumulative trade deficit declined by 30% between January and October 2024 mainly due to lower imports. Together with the gradual decline in gross external debt, from more than 50% of GDP in 2022 to 43% as of Q2 2024, lower current account deficits drive the reduction in external gross financing needs, from an estimated 23% of GDP in 2023-24 to around 20% in 2025-26. An enhanced policymaking, disinflation process and the removal of Türkiye from the FAFT grey list support a more favourable investor sentiment and foreign capital inflows.

Furthermore, the replenishment of international reserves is expected to continue if the current policy stance is maintained. Gross international reserves have increased from less than USD 130bn in October 2023 to USD 160bn in November 2024. Similarly, the CBRT’s net foreign assets, excluding foreign currency swaps with commercial banks, turned positive in June 2024, increasing from minus USD 60bn in October 2023 to USD 35bn in November 2024. International reserves account for 86% of short-term foreign debt, against a record low of 59% in May 2023, mitigating refinancing risk. The roll-over ratio of local banks’ external debt rose from less than 100% in May 2023 to approximately 120% in August 2024.

Finally, financial stability risks have been reduced by the restrictive monetary policy and simplification of financial regulations supporting de-dollarisation. The CBRT terminated policies distorting capital allocations, among which swaps with domestic banks, holdings of government bonds at below-market rates, and the foreign currency protection deposits (KKM accounts). The transmission of monetary policy has been strengthened through the sterilisation of excess liquidity, via higher reserve requirements, and growth limits on lira and foreign currency loans. The share of foreign currency-protected deposits in total deposits declined from 20% as of end-2023 to 6.7% in November 2024, whereas the share of lira deposits increased from 42% to 57.5%. The net foreign-currency position of the banking sector has improved, from minus TRY 19bn in February 2023 to TRY 62bn in October 2024, bolstering its shock absorption capacity.

Rating challenges: high inflation; high vulnerability to external shocks; lingering financial stability risks

Türkiye’s long-term ratings are constrained by inflation rates significantly above CBRT’s medium-term target and peers. The decline in inflation is mostly constrained by services and administrated prices because of backward-looking indexation of adjustments. The main risks on disinflation relate to a lower tolerance to economic slowdown leading to a premature easing of monetary policy, large hikes of the minimum wage, the absence of spending-based fiscal consolidation and the crystallisation of contingent liabilities from the early retirement scheme, public-private partnerships, state-owned enterprises, and natural disasters. Türkiye’s long-term ratings are also constrained by lingering external and financial risks, among which pressure on the private sector’ foreign position, as well as institutional and geopolitical risks.

Rating-change drivers

The Stable Outlook reflects Scope’s view that risks to the ratings are balanced over the next 12 to 18 months.

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

1. Strengthened inflation outlook, based on enhanced credibility, independence, and effectiveness of the central bank.
    
2. Stronger fiscal outlook, raising confidence in the capacity to reach and maintain a primary surplus.
    
3. Higher international reserves, based on lower external gross financing needs and higher foreign capital inflows.

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

1. A sharp economic slowdown or an external shock, threatening disinflation.
    
2. Declining international reserves, weakening external resilience and increasing financial stability risks.
    
3. Severe domestic political pressure, acute deterioration in security conditions and international relations.

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) debt profile and market access; iii) current account resilience; iv) external debt structure; v) resilience to short-term external shocks; vi) financial sector oversight and governance; vii) financial imbalances; viii) environmental factors; and ix) governance factors.

On aggregate, the QS generates a three-notch negative adjustment for Türkiye’s credit ratings.

The extraordinary one-notch downside adjustment previously applied across foreign- and local-currency long-term ratings was removed to account for a sustained track record of sounder macro-financial management, driving the gradual unwinding of economic imbalances. The further one-notch downside adjustment previously applied for foreign-currency issuer and senior unsecured long-term ratings was removed to account for lower balance-of-payments risks.

Together these adjustments indicate BB- long-term foreign- and local-currency ratings for Türkiye.

A rating committee has discussed and confirmed these results.

Factoring of environment, social and governance (ESG)

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 and plans to double wind and solar energy capacity by 2035, the country faces deep challenges on natural resources protection and climate change mitigation, for instance to reduce power generation through coal plants. This drives Scope’s ‘weak’ qualitative assessment relative to sovereign peers.

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. 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. CBRT, Press Release on Interest Rates, November 2024
2. CBRT, Inflation Report, November 2024
3. CBRT, Inflation Outlook in Türkiye, October 2024
4. Republic of Türkiye, Medium Term Program 2025-2027, September 2024
5. Ministry of Treasury and Finance, Turkish Economy, Presentation, November 2024

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 4.0), 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 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 28 June 2024.

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, as well as a list of Ancillary Services and certain non-Credit Rating Agency services provided to Rated Entities and/or Related Third Parties.

Conditions of use / exclusion of liability
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