Moody's revised Türkiye's outlook from stable to positive on Friday, citing the decisive change to the country's monetary policy following the elections in May.
The agency maintained Türkiye's ratings at "B3".
Moody's said that the policy pivot now improves the prospects for bringing down the country's currently very high inflation rates to more sustainable levels.
Notably, the rating B3 is six notches below investment grade.
The return to orthodox monetary policy improves the prospect for reducing the nation’s major macroeconomic imbalances, analysts Kathrin Muehlbronner and Dietmar Hornung wrote in a Friday statement.
"While headline inflation is likely to rise further in the near term, there are signs that inflation dynamics are starting to turn, indicative of monetary policy regaining credibility and effectiveness," Moody's said.
Türkiye's annual inflation at the end of last year surged to approximately 65 percent, surpassing Moody's earlier projections of around 53 percent.
The agency added that its assessment of the country's creditworthiness could improve rapidly if Türkiye stuck to the new plan.
The return to orthodox monetary policy is decidedly positive, Moody’s revealed in a report published on December 20.
Monetary tightening also improves prospects for reducing Türkiye's external imbalance and rebuilding the Central Bank’s foreign exchange reserves, which should reduce the country’s vulnerability to external shocks.
The outlook could be upgraded to positive if the tight monetary stance is maintained and wage agreements align with the CBRT’s objective of significantly reducing inflation.
However, headline inflation is likely to rise further in the near term, and inflation expectations remain too high. A sharp slowdown in growth poses another risk, as this would increase the risk of a return to previous unorthodox policies.
If the transition to orthodox policies is short-lived, as it was in early 2021, the outlook could be revised to negative.
The Central Bank of Türkiye (TCMB) raised its interest rate by 34% from 8.5 percent in May to 42.5 percent in December.
Turkish economist Mahfi Egilmez sees Moody's shift in the Turkish outlook from stable to positive as a direct response to the country's dedication to a stringent monetary policy and a return to rational economic policies.
Moody's expects the reduction in external deficit to accelerate further in 2024, with a full-year deficit below $40 billion (3.3% of GDP).
In a related context, Turkish Finance Minister Mehmet Simsek said that Türkiye's monetary policy will remain tight for a while to ensure that inflation falls and remains anchored at lower levels.
"The annual current deficit, which decreased by $10.7 billion compared to May to $49.6 billion, is at the level of $22.5 billion excluding gold," he said.
Simsek added that despite the foreign trade deficit being $6 billion below the medium-term program estimate in 2023, they evaluate that the year-end current account deficit will exceed the MTP forecast.
"The weakened service revenues due to geopolitical tensions are effective in this development," he noted.
