Türkiye may be on the verge of receiving another credit rating upgrade in November from S&P Global, according to a top analyst at the agency, amid strong improvement in foreign exchange reserves and a rapidly narrowing current account deficit.

More than a year-long tight monetary and fiscal policy drive has seen Türkiye rebuild its foreign exchange coffers, lower imports and sharply rein credit growth to curb overheated demand and lower stubborn inflation.

The policy reversal since last June helped Türkiye become the only country to secure upgrades from the world’s three leading credit agencies – Fitch Ratings, Moody’s and S&P Global – this year.

Frank Gill, sovereign ratings senior director at S&P Global Ratings, said some credit rating criteria, especially external indicators, have improved after the policy change, particularly citing the increase in net foreign exchange reserves.

In May, S&P upgraded Türkiye’s ratings to "B+" from "B," saying that the coordination between monetary, fiscal and income policy is set to improve amid external rebalancing, while it maintained a "positive" outlook.

It will announce its next assessment in early November. Gill emphasized that they take into account many indicators, especially the net reserve levels and the positive trend in the current account deficit, in their credit rating decisions.

"A few credit metrics for the Turkish economy have improved, particularly external indicators. We estimate that net foreign currency reserves at $105 billion are well over twice what they were last year," Gill said.

Narrowing current account deficit

Gill said Türkiye's current account deficit is narrowing very quickly, reflecting a lower energy bill, with oil prices continuing to soften, as well as lower net gold imports.

"We are forecasting that current account deficit will be slightly above 1% of GDP for 2024 as a whole," he said, adding that these two factors are a "big deal" and positive, and the rating action is largely on those two factors. "I think this is a big change on the external side," he said.

However, Gill said there are also a lot of indicators that are going to be reviewed to reach this decision as one of the big questions for them is what is the direction of public finances in the country as well as if Türkiye will maintain the same course of policies for multiple years.

He said their baseline projection is that they will, but there are risks to their baseline, in particular, "austerity fatigue."

In that regard, to the question of whether an upgrade for Türkiye is still possible in November, Gill said: "Sure, when we do have a positive outlook. I think it is a big deal that net reserves are now above $100 billion comfortably and that current account deficit is narrowing."

Earlier this month, credit rating agency Fitch upgraded Türkiye's long-term foreign-currency Issuer Default Rating to "BB-" from "B+," citing improved fiscal policy and better external buffers.

Fitch, which has upgraded Türkiye's credit rating for the second time this year, also changed its outlook from "positive" to "stable."

In July, ratings agency Moody's upgraded Türkiye's ratings to "B1" from "B3," citing improvements in governance and a tighter stance on monetary policy.

Gradual disinflation process

S&P Global Ratings will also be closely watching the interest rate policy of the Central Bank of the Republic of Türkiye (CBRT).

The bank held its main interest rate steady at 50% for a sixth straight month last week, saying it remained highly attentive to inflation risks but dropped a reference to potential tightening.

The wording change provided the first guidance signaling that rate cuts will eventually come.

The last time the bank raised its one-week repo rate was in March, when it hiked by 500 basis points to round off an aggressive tightening cycle that started in June last year.

Annual inflation dipped below 52% in August, compared to its peak of 75% this May.

Given the headline inflation, it would be a risk if the central bank eases monetary policy too soon, according to Gill.

"If that were to trigger more volatility in the exchange rate, that would really quickly pass on to inflation. There is still a very strong relationship between the exchange rate and headline inflation. We will watch that as well as the next wage agreement early next year," he noted.

Gill said he expects the bank to "make very cautious monetary rate cuts during the fourth quarter of this year, perhaps starting in November."

"It takes a long time to bring down elevated inflation. Services inflation remains very high but goods inflation is coming down faster than expected while food inflation has also been easing," Gill said.

S&P Global Ratings forecasts inflation to end this year at 43% before falling to 23% at the end of 2025 and about 10% at the end of 2026. It sees it easing below 10% in 2027.

"Thus, we do not project single-digit inflation until 2027. We are forecasting a gradual disinflation, but the emphasis is on gradual. We think one of the pillars of the disinflation plan is to maintain only slight depreciation of the lira against the dollar and euro and maybe a slightly riskier pace of depreciation but next year Turkish lira is still going to depreciate by less than inflation," Gill said.

He added that once relative inflation between Türkiye and its partners is adjusted, the lira seems to be "quite strong, arguably overvalued."

The government forecasts inflation will fall below 42% by year-end. It sees it at 17.5% in 2025 and at 9.7% by 2026.

"Thus, in our view, by the end of this year, the policy rate of the Central Bank of Türkiye would be above the headline inflation," Gill said, noting that "we certainly would not expect the policy rate to be below 45% by the end of this year."

Growth to sharply slow down but no recession

As the demand has started to weaken, S&P Global Ratings expects 3.6% economic growth this year in Türkiye, while it will slow down to around 2% next year.

"We do not expect a recession in Türkiye. After a slowdown in 2025, we expect a recovery at above 3% in 2026. Türkiye could have a sharp slowdown, as in 2019, for example, but we do not project negative growth for any calendar year," Gill said.

"Türkiye is a very resilient economy; it has an extremely resilient private sector, is diversified and open, and it has a customs union with the EU. So it has a number of advantages that other emerging markets like Argentina or even Brazil do not have, in particular a far more open economy, meaning that if domestic demand is weak, companies can focus on sales abroad."

Türkiye's GDP growth is forecast to accelerate to 3.5% next year, 4.5% in 2026 and 5% in 2027, according to the government's medium-term economic program.

Gill said the government has an ambitious fiscal target for next year and that most fiscal tightening will kick in next year. ​​​​​​