Fitch Ratings late on April 10 downgraded its rating outlook on Turkey to Stable from Positive in response to a marked decline in central bank FX reserves in the face of economic impacts caused by the conflict in the Middle East.

The move was made by Fitch as part of an unscheduled rating review. Under applicable credit rating agency (CRA) regulations, the publication of a sovereign review is subject to restrictions and must take place based on a published schedule, although, as in this case, there are exceptions that allow a deviation from the review schedule, the rating agency noted.

Justification for exception

An exception can apply when the CRA finds it necessary to “deviate from the schedule in order to comply with the CRAs' obligation to issue credit ratings based on all available and relevant information and disclose credit ratings in a timely manner”, said Fitch.

Prior to the outlook downgrade, the next scheduled date for a Fitch review of its rating on Turkey was July 17.

All stable now

In January, Fitch raised Turkey’s outlook to Positive, citing a faster-than-expected rise in FX reserves. In doing so, it became the first international CRA to assign a Positive outlook to the country.

Turkey currently has a BB-/Stable rating (at three notches below investment grade) from Fitch Ratings, a Ba3/Stable (at three notches below investment grade) from Moody’s Ratings and a BB-/Stable (at three notches below investment grade) from S&P Global Ratings.

Moody’s next review date is scheduled for July 24. Fitch, meanwhile, has stuck to the date of July 17 for a scheduled review, while S&P has circled April 17 and October 16 on the calendar.

$50bn of interventions

The outlook revision reflected a pronounced fall in the international reserves since the beginning of the Iran war at the end of February, Fitch said, estimating FX interventions by Turkey’s central bank to defend the lira at above $50bn.

A more protracted conflict would further pressure Turkey’s external finances and inflation, mainly due to the country’s sizeable energy trade deficit, Fitch also noted.

Ceasefire reversed outflows

Portfolio (mainly carry trade) outflows from Turkey reversed with the April 8 announcement of a two-week ceasefire, but an oil price shock endures despite a retreat into the $90s/barrel range from the $100s (the $90s still compare significantly higher with the $60s-70s seen prior to the February 28 outbreak of the war).

Sustained access to FX debt versus weak governance

The ratings are supported by Turkey’s large and diversified economy, low government debt, record of sustaining access to external financing in periods of stress and resilient banking sector, Fitch said.

The ratings are, meanwhile, constrained by Turkey’s record of high inflation, repeated periods of political interference in monetary policy, recurrent balance-of-payments crises, low external liquidity relative to high financing requirements and weak governance, it added.

Not as bad as in 2024

Turkey’s gross international reserves fell to $162bn in early April from $210bn at end-February, driven by non-resident outflows and, to a lesser extent, a lower gold price and greater FX demand from corporates.

Net FX reserves, excluding swaps, fell sharply to below $19bn from $79bn. The figure is still well above the 2024 low of minus $66bn. The sharper fall in the reserves net of swaps partly reflects the resumption of FX swaps with domestic banks.

Oil jolt

Fitch forecasts that Turkey’s current account deficit will widen by 0.6 percentage points to 2.5% of GDP in 2026 on higher energy prices and the lagged impact of real exchange rate appreciation.

Fitch's baseline is for a gradual normalisation of oil flows in May and June.

An additional $20/barrel rise in the oil price in 2026 would increase Turkey’s current account deficit by more than 1% of GDP. 

Fitch currently views the added credit risk from direct spillovers from the Iran conflict or broader regional instability as low.

Dollarisation at 40%

The deposit dollarisation ratio at Turkish banks was broadly stable in March. The figure stood at near 40% compared to 73%, including FX-protected deposits (KKM), as of mid-2023.

Fitch anticipates that the authorities will continue to prioritise containing dollarisation risks by supporting a gradual path of nominal lira depreciation and employing macro-prudential tools to maintain the attractiveness of lira deposits.

“Moderate” tightening

Turkey’s central bank raised its cost of funding by 300bp on March 1 by switching liquidity to the overnight lending rate, which stands at 40%.

Fitch projects that Turkey’s monetary policy will remain fairly tight this year with a real policy interest rate of 5.5% (ex-post) at year-end.

Stimulus ahead of snap election

Fitch anticipates stimulus next year from higher fiscal transfers and the easing of credit caps ahead of an election brought forward from the scheduled May 2028 date for the poll. However, the rating agency sees no return to the highly unorthodox economic policy that Turkey applied during 2022-2023.

Nevertheless, there are sizeable downside policy risks in Turkey given a track record of repeated shifts to excessive easing that underlined a lack of central bank independence, Fitch also observed.

“Very high inflation”

Fitch currently anticipates that Turkey’s official headline inflation will fall to 27% at end-2026, suggesting an upward revision of 2 percentage points. Turkey released official inflation at 30.9% for March. No sovereign rated by Fitch has higher inflation.

Staying out of the war

Fitch considers the risk of Turkey being dragged directly into the Middle East conflict as low. Ankara’s relations with the US have improved over the last year and efforts aimed at Kurdish reconciliation have helped the domestic security situation.

Fitch also considers that there has been a decline in the potential for domestic political events to trigger market volatility on the scale that followed the March 2025 jailing of Istanbul mayor Ekrem Imamoglu.