Türkiye: Political Uncertainty Clouds Inflation Outlook, Further Policy Normalisation

Higher financial volatility in Türkiye could be credit negative if it leads to higher inflation or to a reversal of the current orthodox macroeconomic policy mix that the authorities have consistently pursued since the general elections of May 2023.

Scope Ratings (Scope) upgraded the long-term ratings to BB- in December 2024 based on more effective monetary policy driving inflation lower, helping to rebuild international reserves, and raising prospects for tighter fiscal policy.

However, significantly higher political uncertainty, following the arrest of an opposition politician, coupled with a more challenging international environment (trade, geopolitical tensions) could make it much harder for officials to contain inflation.

In response to the Turkish lira’s sharp depreciation of 4% against the US dollar, on 20 March the Central Bank of the Republic of Türkiye (CBRT) raised its overnight lending rate, suspended one-week repo auctions and injected liquidity into local markets.

Figure 1. Inflation has steadily declined over the past nine months

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Political Uncertainty Comes as Policy Normalisation Has Started to Pay Dividends

The impact on the inflation outlook could be even bigger as the CBRT has eased financial conditions since December 2024, reducing its policy rate from 50.0% to 42.5% (Figure 1).

Sustained higher uncertainty is also expected to diminish the economy’s growth prospects. After 3.2% growth in 2024, real GDP growth is likely to slow to 3.0% in 2025. Household consumption, the main driver of domestic growth, is sensitive to higher inflation and borrowing costs.

A more pronounced economic slowdown also increases the risk that fiscal policy remains expansionary, challenging the government’s ability to reach its objective of a primary fiscal balance by 2026.

Scope expects a budget deficit of about 3.6% of GDP in 2025 and in 2026, and a general government debt-to-GDP ratio of 26%.

External and Financial Risks Remain Significant

The Turkish economy is more resilient than it was a few years ago and can accommodate some volatility, due to higher international reserves and more effective macroeconomic policies, which have eased the strains on public and private-sector balance sheets.

Non-resident holdings rose to more than 10% of government debt in January 2025, up from 2% in January 2024. Net assets of the CBRT, excluding foreign-currency swaps with commercial banks, have reached multi-year highs of more than USD 40bn.

However, Türkiye’s BB- ratings reflect prominent external and financial risks, as reflected in downward pressures on the net foreign positions of local banks. Local banks’ balance sheets could deteriorate if they are called on by the authorities to continue supporting the local currency.

If sustained over a prolonged period, the interventions of the CBRT to contain the depreciation of the lira will also erode its reserves and lower resilience against future external shocks. This could reduce confidence in lira-denominated assets and encourage higher dollarisation.

Although Türkiye’s public finances have proven to be resilient to domestic political uncertainty in the past, the sovereign’s rating trajectory remains vulnerable to the challenging macroeconomic conditions and sudden shifts in domestic economic policy.

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Thomas Gillet is a Director in Sovereign and Public Sector ratings at Scope Ratings GmbH.