Fitch Ratings has revised its outlook on Turkey’s credit ratings to positive from stable, the rating agency said on January 23 following a scheduled country review.

Moody’s Ratings conducted a scheduled review on the same day, but it passed with no action.

Outlook upgrades on the way

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

Moody's introduced a rating upgrade in July 2025, and looks unlikely to make another move in that sphere for a while.

With Fitch having initiated outlook upgrades, should Turkey’s positive real policy rate approach remain in effect, the other two major rating firms look set to follow their peer.

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

Faster-than-expected rise in reserves

Fitch’s outlook upgrade on Turkey reflected a further reduction in external vulnerabilities from a faster-than-expected rise in foreign-exchange (FX) reserves since Fitch upgraded the country’s rating in September 2024.

An improved quality of reserves, a fall in FX contingent liabilities, the continuation of fairly tight macroeconomic policies and some reduction seen in the risk of marked policy loosening were other reasons given for the upgrade.

The ratings are supported by Turkey’s large and diversified economy, low government debt and record of sustained access to external financing.

However, they are constrained by the country’s record of high inflation, repeated periods of political interference in monetary policy and unorthodox policy, recurrent external crises and weak governance.

Reserves hit record on gold rally

Turkey’s gross FX reserves rose to $205bn in mid-January from $155bn at end-2024. Net reserves excluding swaps recovered more strongly to $78bn from a low of minus $66bn in March 2024 as the unwinding of swaps with local banks from 1H24 improved the quality of reserves.

This was initially driven by lower dollarisation and capital inflows and by higher gold prices seen since last year.

Turkey’s external debt (including trade credits) maturing over the next 12 months totals $224bn, still high relative to its FX reserves.

De-dollarisation since 2023

The share of FX and FX-protected deposits declined slightly to 39% of total deposits in 2025 from 73% in mid-2023. The state's FX-protected deposit scheme was, meanwhile, successfully wound down.

FX market interventions to continue

Fitch anticipates that Turkish authorities will continue to intervene to support steady nominal lira depreciation and employ macroprudential tools to contain dollarisation risks that will become more challenging closer to the next elections.

4.5% real policy rate across 2026

Fitch projects monetary policy will remain relatively tight at end-2026 with a real policy interest rate of 4.5%, prior to a loosening to 2% at end-2027.

Early elections assumed

Fitch assumes that Turkey's presidential elections will be held before the scheduled date of May 2028. The rating agency also assumes the introduction of a stimulus ahead of the elections that will include higher fiscal transfers, minimum wage hikes and the easing of credit caps.

However, it does not expect a return to the ultra-loose, highly unorthodox policy seen in 2022 and 2023. There are, meanwhile, sizable policy downside risks, given weaknesses in Turkey’s monetary policy framework, including a lack of central bank independence.

Fitch sees a decline in the potential for domestic political events to trigger market volatility on the scale that occurred following the March jailing of Istanbul mayor Ekrem Imamoglu. However, significant risks remain ahead of the next polls.

Turkey’s World Bank Governance Indicator percentile ranking has continued to trend down. It has reached 31, well below the BB median of 44.

Improved US relations

Ongoing efforts towards reconciliation with the Kurds, despite recent setbacks, should reduce security risks and support improved US relations.

This could open a path to an agreement with the main Kurdish party DEM to help secure the 360 parliamentary seats needed for President Recep Tayyip Erdogan to set in motion an early election.

Nevertheless, the volatile regional security environment continues to pose geopolitical challenges.