Türkiye's tight monetary stance and its shift to more conventional economic policies underpin its sovereign rating, according to S&P Global Ratings. Slower disinflation and the run-up to elections will test the central bank's commitment to discipline, while the banking sector faces significant but manageable risks.
Karen Vartapetov, S&P Global's director and sovereign lead analyst for Central and Eastern Europe and Türkiye, said the country's BB- sovereign rating with a stable outlook reflects significant progress since 2023. That was when Ankara began reversing years of ultra-loose monetary policy aimed at boosting growth despite surging inflation.
Disinflation regained pace recently after higher energy prices and a succession of shocks halted the momentum following the start of the Iran war. Annual inflation last cooled to below 30% in September.
Weakening domestic demand, slowing retail sales and lower credit growth show that tight policy is feeding through to the economy, and Vartapetov said this will let the central bank keep focusing on disinflation.
"Disinflation has been delayed, but we believe not derailed," he told Reuters.
The central bank cut its key interest rate to 36% on Thursday after lower-than-expected September month-over-month inflation data. It had held the rate at 37% for its previous five policy meetings.
Vartapetov said the new economic team has gained credibility but needs more. "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," he said.
Presidential and parliamentary elections are scheduled for May 2028, though officials have said they could be held a few months early. S&P, whose assessment broadly mirrors those of Fitch and Moody's, will review Türkiye's rating in April next year.
Significant risks, but manageable
Regina Argenio, director of financial institutions at S&P Global Ratings, said the agency has just affirmed its Banking Industry Country Risk Assessment (BICRA) for Türkiye.
Argenio said the risks that the banking system faces are significant, but they consider the situation manageable given the progress in reducing inflation and a better economic outlook than expected at the start of the war in the Middle East.
S&P is closely watching banks' ability to keep rolling over their sizeable external debt, and any disruption there could be problematic, she told Anadolu Agency (AA).
Credit, profitability
Argenio said credit volumes are shrinking because it is very hard for banks to expand lending at current high real interest rates. She said "next year could be better" if easing in monetary policy is reflected in pricing and lending.
SMEs and retail customers struggle with such extreme financing costs, and this is where S&P sees a potential basket of asset-quality risks for banks, said Argenio.
S&P expects net interest margins to improve next year, since lower rates would translate fairly quickly into cheaper Turkish lira funding. Foreign-currency funding costs could rise because of interest rate dynamics abroad. The outcome, Argenio said, depends on the timing and size of rate cuts and on the success of the disinflation program.
Fund crisis
Both analysts addressed the investment fund crisis, which erupted last month when regulators ordered the liquidation of more than 100 funds over allegations that assets had been manipulated and inflated in value.
Vartapetov said S&P views it primarily as a governance and supervision issue rather than a threat to financial stability. Most money withdrawn from the sector moved into lira deposits rather than foreign currency or gold, and policymakers responded quickly to contain the fallout.
"We treat that story as a governance story rather than a broad-based financial crisis," he 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."
Argenio said the impact should be limited if the problem proves isolated, and she called the policy response quite strong. Liquidity provided to the banking sector helped contain the effects.
It is still too early to judge the impact on external borrowing costs, she said, and S&P expects those to rise anyway because of global rate dynamics. Turkish borrowers could also face a higher risk premium, depending on how well the situation is contained and how quickly it is managed domestically.