Critical message from S&P for Türkiye's credit rating! He explained two conditions

International credit rating agency S&P Global Ratings evaluated its expectations regarding the Turkish economy and developments that may affect the future of its credit rating. Karen Vartapetov, the Agency's Central and Eastern Europe (CEE) and Commonwealth of Independent States (CIS) Country Credit Ratings Director and Turkey Lead Analyst, said that it is important for the disinflation process to continue and the strengthening of international reserves for a possible increase in Türkiye's credit rating.

In its last credit rating assessment published in April, S&P Global Ratings confirmed Türkiye's credit rating at "BB-/B" level and maintained its rating outlook as "stable". Instead of publishing its expected evaluation on October 16 on Friday, the institution announced it on Monday with an analysis that did not include any change in grades.

Vartapetov stated that this situation does not mean that an extraordinary evaluation will be made and that in cases where there is no change in the credit score, statements can sometimes be published on Monday instead of Friday.

DISINFLATION AND RESERVES ARE IMPORTANT FOR INCREASE IN CREDIT RATING

Stating that they expect the disinflation process to continue in Türkiye, Vartapetov said that a stronger decline in inflation than expected could be positive for the credit score.

"If disinflation is potentially stronger than expected, we think this will be an upward factor in terms of credit rating," Vartapetov said. he said.

Stating that the single-digit inflation target may be ambitious, Vartapetov evaluated that low double-digit inflation rates are more realistic. The adequacy of international reserves and the continued confidence of households in Turkish lira denominated assets will also be decisive in terms of Türkiye's credit rating.

Vartapetov noted that the Central Bank's continued accumulation of international reserves, maintaining domestic confidence in the Turkish lira and the absence of policy changes would create a scenario compatible with a higher credit rating.

SLOWING SIGNAL IN SERVICES INFLATION

Making evaluations regarding the basic trend of inflation, Vartapetov stated that there are some positive signs of slowdown in services inflation. However, he stated that since pricing behavior depends on past inflation, it may take time to bring expectations under control.

Stating that the energy price shock caused by the war in the Middle East increased the projected headline inflation in Türkiye by approximately 7 points, Vartapetov said that, on the other hand, the second round effects of the rise in energy costs remained relatively limited.

Stating that the slowdown in domestic demand is effective in this situation, Vartapetov said that there are strong signs that it is becoming difficult for companies to reflect their increasing costs on consumer prices.

Vartapetov emphasized that monetary policy should be convincing enough to ensure that households keep their savings in Turkish lira instead of foreign currency. He added that fluctuations in global commodity and energy markets and the decisions of other central banks may make the disinflation process difficult.

INTEREST REDUCTION EXPECTATION: YEAR-END ESTIMATED 35 PERCENT

According to S&P Global Ratings' basic scenario, it is possible that the Central Bank of the Republic of Türkiye will cut interest rates by the end of the year. Vartapetov stated that they foresee the policy rate at at least 35 percent at the end of the year.

The institution expects interest rate cuts to continue next year. However, Vartapetov emphasized that these predictions depend on the course of energy prices, especially oil.

Stating that problems that may occur in the balance of payments may put downward pressure on Türkiye's credit rating, Vartapetov noted that a wider current account deficit and households' turning to foreign currency again may pose a risk.

THE EFFECT OF REMITTANCES AND FUND LIQUIDATIONS ON THE TURKISH LIRA IS BEING MONITORED

Vartapetov, who also evaluated the liquidation process of some investment funds in Türkiye, said that the macroeconomic effects of the process have been relatively limited so far.

Vartapetov stated that they did not see strong evidence that the problem in funds spread to broader financial markets or negatively affected confidence in the Turkish lira. He considered it a positive development that the money coming out of the funds was directed to bank deposits in Turkish lira.

However, pointing out that the investigation into the liquidation process is continuing, Vartapetov stated that it is necessary to monitor how investors' losses will be compensated and how the government will approach unresolved liquidations.

Vartapetov stated that the first intervention of the authorities was timely and rapid, and noted that there is still a risk of loss of confidence if investors are not satisfied with the decisions to be taken in the future.

S&P'S INFLATION AND GROWTH FORECASTS

According to S&P Global Ratings' estimates, inflation in Türkiye is expected to be 30.9 percent on average this year and 21.7 percent in 2027.

Economic growth is expected to be 3 percent this year. Due to the war in the Middle East, the agency's growth expectation for this year was reduced by 0.4 points compared to its previous estimate.