Moody's: Turkey's post-election shift positive for credit rating

Moody's has signaled that Turkey's reembrace of conventional economic policymaking since Tayyip Erdogan's May election win could soon start paying dividends in terms of a stronger credit rating, as long as it sticks with it.

For years, Ankara's credit score, which significantly impacts the government's borrowing costs in capital markets, has experienced a decline due to a series of unconventional and crisis-inducing policy decisions.

The dramatic reversal of policy direction following President Recep Tayyip Erdogan's victory in the May election has been marked by the appointment of a new finance minister and central bank head. These officials have taken bold steps, primarily raising interest rates, to address Turkey's persistent long-term inflation issue.

Moody's analyst Dietmar Hornung expressed optimism about the recent changes, stating, "The change of course is clearly credit positive." However, he also emphasized the existence of substantial uncertainties that need to be addressed.

As of its latest assessment, Moody's rates Turkey at 'junk' grade B3 with a "stable outlook." While the formal rating review is scheduled for December, Fitch, which rates the country one notch lower and has assigned a "negative outlook," is set to conduct its rating review this Friday, with S&P Global following suit later in the month.

Hornung acknowledged the positive developments post-election but cautioned that significant challenges lay ahead. These challenges include the formidable task of cooling down inflation, which is expected to reach 65% by the end of the year, and rectifying other "accumulated imbalances" within the Turkish economy.

He emphasized that while the outlook remains stable with no major downside risks in sight, it will take time to observe the full positive impact of these policy changes. When asked about the timing of a potential rating adjustment, whether a shift to a positive outlook or an actual upgrade, Hornung likened it to a marathon rather than a sprint, stating, "We need a track record of more orthodox policy and a reduction of the accumulated imbalances."