Fitch Rating sees Türkiye's policy consistency as credit rating boost

International credit rating agency Fitch Ratings underscored the potential benefits of sustained policy consistency for Türkiye's credit rating.

The agency noted that local elections held last month could prompt post-election fiscal tightening, which would enhance the efficacy of Türkiye’s monetary policy amidst weakened transmission channels.

"If sustained, this improvement in policy consistency should support lower inflation, a narrower current account deficit, and a recovery in international reserves," Fitch mentioned.

The agency highlighted the impact of pre-election public spending on the budget deficit, estimating the central government budget deficit in the first quarter to have reached 5.2% of gross domestic product (GDP).

Fitch forecasts Türkiye to reduce fiscal deficit in 2024

Fitch's forecast anticipates the non-interest deficit to be 2.6% of GDP, emphasizing the role of fiscal policy in bolstering domestic demand during the first quarter.

"We believe the government will reduce the fiscal deficit in the rest of 2024 by slowing spending growth, especially that which is not related to earthquake reconstruction," Fitch added, referring to earthquakes in southern Türkiye in February 2023.

Fitch emphasized that improved policy consistency could lead to lower inflation, a narrower current account deficit, and a recovery in international reserves.

"Inflationary pressures have eased (month-on-month inflation dropped to 3.2% in March from 6% in January), and we forecast annual inflation to decline to 40% by the end of 2024 from 68.5% in March," Fitch added.

Turkish economic officials have expressed optimism about the prospect of inflation starting a sustained drop in the second half of the year.

Source: Newsroom