By Ezgi Erkoyun
ISTANBUL, Oct 23 (Reuters) – Turkey’s tight monetary stance and shift away from unorthodox economic policies underpin its sovereign rating, but slower disinflation and the run-up to elections will test the central bank’s commitment to maintaining discipline, S&P Global says.
Karen Vartapetov, S&P Global’s director and sovereign lead analyst for Central and Eastern Europe and Turkey, said the country’s current BB- sovereign rating with a stable outlook reflects significant progress since 2023, when Ankara began reversing years of ultra-loose monetary policy that was aimed at boosting growth despite surging inflation.
However, he said it was unclear how sustainable the current tight monetary and macroeconomic policy stance would prove as elections approach. Presidential and parliamentary votes are scheduled for May 2028 but officials have said they could be held a few months early.
Higher energy prices and a succession of shocks have slowed progress in bringing down inflation, currently just below 30% annually, Vartapetov said, but a slowdown in domestic demand will allow the central bank to continue focusing on disinflation.
“Disinflation has been delayed, but we believe not derailed,” Vartapetov told Reuters, citing weakening domestic demand, slowing retail sales and lower credit growth as evidence that tight monetary policy is feeding through to the economy.
The bank cut its key interest rate to 36% on Thursday following lower-than-expected September month-on-month inflation data, after keeping the rate at 37% at its previous five policy meetings.
“The new economic team gained some credibility, but they would need more,” Vartapetov said in an interview conducted on Thursday. “It’s still not clear how sustainable these tight monetary and macroeconomic policies are in light of the upcoming electoral effects. That’s what we’re monitoring.”
FUND CRISIS IS GOVERNANCE ISSUE
S&P, whose assessment of Turkey broadly mirrors those of Fitch and Moody’s, will review Turkey’s rating in April next year, he said.
Vartapetov said S&P viewed Turkey’s investment fund crisis primarily as a governance and supervision issue rather than a broader threat to financial stability. The crisis erupted last month and regulators ordered the liquidation of more than 100 investment funds over allegations that assets had been manipulated and inflated in value.
He said most money withdrawn from the sector had moved into lira deposits rather than foreign currency or gold, while policymakers had responded quickly to contain the fallout.
“We treat that story as a governance story rather than a broad-based financial crisis,” Vartapetov said. “What would be important is what sort of lessons the authorities learned and what sort of improvement in supervision is going to take place.”
(Reporting by Ezgi Erkoyun and Ebru Tuncay; Editing by Daren Butler and Susan Fenton)
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