Moody’s Investor Services has improved its outlook for Türkiye’s banking sector, lifting it from negative to stable. This is a timely upgrade as the cash-strapped nation is currently experiencing economic challenges.
The US-based rating agency said, “the operating environment for Turkish banks remains challenging and volatile” and that it is further “weighed down by an anticipated slowdown in economic growth and persistently high inflation.”
Türkiye’s banking landscape
Türkiye has been facing high inflation and a weakening lira. As a result, its economic growth is slowing down and the asset quality in local banks is diminishing.
Moody’s predicted a decline in Türkiye’s economic growth, forecasting a rate of 4.2 percent by the end of the year. This is lower than 2022’s 5.6 percent.
“Profitability will normalize from the peaks recorded in 2022, but nevertheless remain strong. The banks’ external funding position and ‘dollarization’ levels have improved and we expect liquidity, particularly foreign currency, to remain adequate,” the statement continued.
Despite a better outlook, Moody’s noted that there will be continued capital pressure for Turkish banks, as prompted by persistently high inflation and a tumbling lira. According to the agency, asset risk will remain high. Additionally, problematic loans may surface.
After Moody’s released its improved outlook, Borsa Istanbul Banking Sector Index rose by around 4 percent. The index tracks shares in the country’s listed lenders.
Policy shifts
The agency previously revealed that Türkiye’’s credit outlook could turn positive. In a statement last week, it said that the new economic administration’s commitment to tackle inflation and external fiscal imbalances is contributing to the upgrade.
As of its latest report, Türkiye’ now has a B3 stable rating, denoting a speculative and risk-prone assessment.
“The new economic team has committed to bringing down inflation, reducing Türkiye’s large external imbalances and ensuring fiscal discipline and has started to gradually correct the direction of monetary and fiscal policy,” stated Moody’s.
It further emphasized that “the shift toward more orthodox, rules-based and predictable policymaking is credit positive and comes earlier than we had expected.”
President Recep Tayyip Erdogan’s longstanding economic strategy has been to keep interests low, even in the face of high inflation. When the AK Party leader got narrowly re-elected in May, he appointed senior officials who adhere to the conventional understanding that higher interests can address inflation.
Read: Türkiye’s elections: Struggle for economic stability, grain security
More positive indicators
Central Bank Governor Hafize Gaye Erkan also pledged to minimize the regulatory burdens that Turkish banks face. He is a former managing director at investment banking company Goldman Sachs.
These policy changes have so far bolstered Türkiye’s standing with foreign investors, marked by their continued purchasing of Turkish stocks. This is their longest streak to date, and it reflects their improved confidence in the country and its current economic agenda.
Earlier in June, Türkiye also saw a current account surplus, a first in 20 months. This signifies an inflow of funds into the country, demonstrating the potential of its renewed economic direction.
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