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Moody's Revises Türkiye's Outlook to ‘Positive’

Pedestrians in Istiklal Commercial Street in Istanbul, Türkiye, decorated with flags. (Reuters)
Pedestrians in Istiklal Commercial Street in Istanbul, Türkiye, decorated with flags. (Reuters)
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Moody's Revises Türkiye's Outlook to ‘Positive’

Pedestrians in Istiklal Commercial Street in Istanbul, Türkiye, decorated with flags. (Reuters)
Pedestrians in Istiklal Commercial Street in Istanbul, Türkiye, decorated with flags. (Reuters)

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.

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US Economy Grew at Solid 3% Rate Last Quarter, Government Says in Final Estimate

FILE - The New York Stock Exchange, at rear, is shown on Sept. 24, 2024, in New York. (AP Photo/Peter Morgan, File)
FILE - The New York Stock Exchange, at rear, is shown on Sept. 24, 2024, in New York. (AP Photo/Peter Morgan, File)
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US Economy Grew at Solid 3% Rate Last Quarter, Government Says in Final Estimate

FILE - The New York Stock Exchange, at rear, is shown on Sept. 24, 2024, in New York. (AP Photo/Peter Morgan, File)
FILE - The New York Stock Exchange, at rear, is shown on Sept. 24, 2024, in New York. (AP Photo/Peter Morgan, File)

The American economy expanded at a healthy 3% annual pace from April through June, boosted by strong consumer spending and business investment, the government said Thursday, leaving its previous estimate unchanged.
The Commerce Department reported that the nation's gross domestic product — the nation's total output of goods and services — picked up sharply in the second quarter from the tepid 1.6% annual rate in the first three months of the year, The Associated Press reported.
Consumer spending, the primary driver of the economy, grew last quarter at a 2.8% pace, down slightly from the 2.9% rate the government had previously estimated. Business investment was also solid: It increased at a vigorous 8.3% annual pace last quarter, led by a 9.8% rise in investment in equipment.
The final GDP estimate for the April-June quarter included figures showing that inflation continues to ease, to just above the Federal Reserve’s 2% target. The central bank’s favored inflation gauge — the personal consumption expenditures index, or PCE — rose at a 2.5% annual rate last quarter, down from 3% in the first quarter of the year. Excluding volatile food and energy prices, so-called core PCE inflation grew at a 2.8% pace, down from 3.7% from January through March.
The US economy, the world's biggest, displayed remarkable resilience in the face of the 11 interest rate hikes the Fed carried out in 2022 and 2023 to fight the worst bout of inflation in four decades. Since peaking at 9.1% in mid-2022, annual inflation as measured by the consumer price index has tumbled to 2.5%.
Despite the surge in borrowing rates, the economy kept growing and employers kept hiring. Still, the job market has shown signs of weakness in recent months. From June through August, America's employers added an average of just 116,000 jobs a month, the lowest three-month average since mid-2020, when the COVID pandemic had paralyzed the economy. The unemployment rate has ticked up from a half-century low 3.4% last year to 4.2%, still relatively low.
Last week, responding to the steady drop in inflation and growing evidence of a more sluggish job market, the Fed cut its benchmark interest rate by an unusually large half-point. The rate cut, the Fed’s first in more than four years, reflected its new focus on shoring up the job market now that inflation has largely been tamed.
Some other barometers of the economy still look healthy. Americans last month increased their spending at retailers, for example, suggesting that consumers are still able and willing to spend more despite the cumulative impact of three years of excess inflation and high borrowing rates. The nation’s industrial production rebounded. The pace of single-family-home construction rose sharply from the pace a year earlier.
And this month, consumer sentiment rose for a third straight month, according to preliminary figures from the University of Michigan. The brighter outlook was driven by “more favorable prices as perceived by consumers” for cars, appliances, furniture and other long-lasting goods.
A category within GDP that measures the economy’s underlying strength rose at a healthy 2.7% annual rate, though that was down from 2.9% in the first quarter. This category includes consumer spending and private investment but excludes volatile items like exports, inventories and government spending.
Though the Fed now believes inflation is largely defeated, many Americans remain upset with still-high prices for groceries, gas, rent and other necessities. Former President Donald Trump blames the Biden-Harris administration for sparking an inflationary surge. Vice President Kamala Harris, in turn, has charged that Trump’s promise to slap tariffs on all imports would raise prices for consumers even further.
On Thursday, the Commerce Department also issued revisions to previous GDP estimates. From 2018 through 2023, growth was mostly higher — an average annual rate of 2.3%, up from a previously reported 2.1% — largely because of upward revisions to consumer spending. The revisions showed that GDP grew 2.9% last year, up from the 2.5% previously reported.
Thursday’s report was the government’s third and final estimate of GDP growth for the April-June quarter. It will release its initial estimate of July-September GDP growth on Oct. 30.