The arrest and imprisonment of opposition politicians in Turkey last week could pose a risk to confidence in the country's economy and the stability of the exchange rate, S&P Global Ratings said on March 24.

S&P said it believed that the second-round effects of rising uncertainty on household spending, capital inflows, the exchange rate, growth and inflation can be material, interrupting what had up until recently been a notable decline in deposit dollariation and inflation.

On March 19, the USD/TRY rate jumped to the 42s from the 36s during the morning hours. Since then, the regime has been drawing one of its trademark “straight lines” on the USD/TRY chart, at around the 38-level this time.

Since the end of 2023, authorities in Turkey have made considerable headway in convincing households to shift their savings out of gold and hard currency and back into domestic currency, according to the rating agency.

The combined share of FX-linked deposits held at local banks has retreated from the 60%s to the 40%s during the process.

This has boosted the country's FX reserves and encouraged disinflation, supporting S&P’s rating on Turkey.

Since the second half of 2023, following the U-turn to economic orthodoxy made by Turkey in June 2023, the central bank’s net FX position (excluding off-balance sheet derivative items) improved by $130-140bn from minus $60-70bn to a positive $60-70bn.

On March 3, the Turkish Statistical Institute (TUIK, or TurkStat) said that Turkey’s consumer price index (CPI) inflation officially stood at 39% y/y in February versus 42% in January and 44% y/y at end-2024.

It is not advisable to plan, price or draw inferences based on TUIK data. There is widespread concern about the reliability of Turkey’s official data series.

Turkey enjoyed two-notch upgrades in 2024

Turkey currently has a BB-/Stable rating (at three notches below investment grade) from Fitch Ratings, a B1/Positive (at four notches below investment grade) from Moody’s Investors Service and a BB-/Stable (at three notches below investment grade) from S&P Global Ratings.

Thanks to its shift to orthodox policymaking, Turkey enjoyed two notches worth of rating upgrades from all three agencies in 2024.

Moody’s has scheduled to release its Turkey reviews on January 24 (skipped with no action) and July 25.

Fitch has scheduled to review Turkey’s ratings on January 31 (affirmed) and July 25 while S&P has pinned April 25 and October 17.

Second-round effects

The upgrades came as the rating agencies tracked progress made by Turkey in reforming its economic approach but S&P Global said on March 24 noted “the return of political tensions could be a setback to these reforms”.

Recent central bank emergency interventions have included direct foreign currency sales, liquidity and forwards operations and an emergency increase in the overnight lending rate, according to S&P.

On March 20, the central bank announced an emergency rate hike. More steps are expected to follow.

It is estimated that amid the tumult caused by the regime's actions and the subsequent protests the central bank has so far sold $12-13bn of its FX reserves (less than 10% of the reserves), including about $1bn in lira-settled forward contracts.