S&P Upgrades Turkey: What Will Be the Market Reaction?
The international credit rating agency S&P has upgraded Turkey's credit rating from "B+" which is four levels below investment grade, to "BB-". The outlook has been changed from positive to stable. This move, which aligns with market expectations, is not expected to have a significant impact on the markets. S&P now shares the same rating level as Fitch and will monitor Turkey's economic policies moving forward.
Moody’s, on the other hand, retains Turkey’s credit rating at four levels below investment grade (B1) with a positive outlook. In İş Yatırım's analysis, it is noted that Moody’s is anticipated to align with the other two rating agencies during the first review meeting scheduled for 2025.
International Comparisons and CDS Effects
Following S&P's decision, Turkey is now rated alongside South Africa, Uzbekistan, Jordan, and Costa Rica in terms of credit rating. It is noted that Brazil, Vietnam, Colombia, and Morocco hold higher rating levels than Turkey, benefiting from high reserve adequacy ratios.
As of the market close on November 1, Turkey's 5-year CDS risk premium is hovering around 270. According to İş Yatırım, the current risk premium seems consistent with S&P’s credit rating level. Domestic factors, particularly positive developments in reserve accumulation and inflation trends, could potentially reduce the CDS premium to 250. A decrease in global uncertainties is also likely to play a supportive role in this process.
Market Reactions to Previous Rating Increases
Since 2003, in the 17 credit rating increases observed, although there has been positive pricing just before the rating increase, a generally negative trend is noted following the decision. According to İş Yatırım's analysis, in previous sessions, the bank index has positively differentiated from the industrial index. In 2024, however, this relationship has weakened; the BIST 100 index saw horizontal or selling trends before the decisions on September 6 and November 1. Nonetheless, in the last five sessions, Turkey's MSCI index has outperformed other emerging markets positively.
The market has become more accustomed to such rating increases. It seems evident that cyclical weakness has become pronounced and the market is beginning to assimilate such updates. The İş Yatırım report emphasizes that market reactions before future S&P moves will likely be more limited.
S&P's Assessment and Economic Implications
S&P summarizes the rationale behind upgrading Turkey’s credit rating as tight monetary policy, narrowing the current account deficit, and increased reserves. However, the agency indicates that a further increase in the rating requires inflation to fall into single-digit figures or a notable increase in lira-denominated investments among investors. If monetary policy remains tight, it is projected that the currency deposit ratio could decline to one-third by mid-2025.
Regarding the expected minimum wage increase at the beginning of the year, S&P expresses that an increase exceeding 30% could extend the disinflation process. In the İş Yatırım report, a higher hike is anticipated. Meanwhile, estimates for inflation converge at a rate of 44%, while different views exist for 2025. İş Yatırım holds a more elevated forecast of 31.6% compared to S&P’s estimate of 27.6% for 2025 inflation. The differences in minimum wage and growth expectations are believed to play a significant role in this divergence.