S&P says Türkiye's policy shift on track, banking risks manageable

Türkiye's sovereign rating benefits from a policy shift away from years of ultra-loose monetary policy. Since 2023, Ankara has moved toward tighter, more conventional economic policies. The central goal is to slow inflation and restore confidence in economic management. That progress supports the country's BB- rating and stable outlook.

The key tool is a high policy interest rate. The central bank held its rate at 37% for five meetings before cutting it to 36% after softer September monthly inflation data. Tight policy is weakening domestic demand, retail sales, and credit growth. Those effects show that monetary restraint is reaching the wider economy.

S&P believes disinflation has slowed but not been derailed. However, the new economic team still needs to prove that discipline can survive election pressures. Presidential and parliamentary elections are scheduled for May 2028, though they could come earlier. S&P will review the rating in April next year.

Disinflation is a slowdown in the rate at which prices increase. If inflation falls from 40% to 30%, prices are still rising rapidly, but they are rising less quickly than before. Deflation is different: it means the general level of prices is actually falling. Disinflation can therefore reduce pressure without making goods cheaper immediately.

Türkiye's recent data illustrate the distinction. Annual inflation cooled to below 30% in September. That does not mean food, services, or other goods became cheaper overall. It means their average prices increased less rapidly than during the earlier period of higher inflation. September month-over-month inflation was also lower than expected.

S&P says disinflation regained pace after energy prices and shocks delayed progress following the start of the Iran war. The agency describes the process as delayed, not derailed. High interest rates are weakening demand and credit, helping the central bank continue focusing on slower price growth.

Türkiye's central bank cut its key interest rate to 36% on Thursday. It had kept the rate at 37% during its previous five policy meetings. The move followed lower-than-expected September month-over-month inflation data. Even after the cut, borrowing costs remain high and monetary policy remains tight.

Annual inflation most recently cooled to below 30% in September. The article does not give a more precise inflation figure. It explains that disinflation had slowed after higher energy prices and a succession of shocks following the start of the Iran war. More recently, weaker domestic demand and slower credit growth showed tighter policy was taking effect.

The recent direction is therefore mixed but important. The interest rate has edged down by one percentage point, while inflation has continued to slow on an annual basis. S&P believes the disinflation process has regained pace. It is watching whether that progress continues as elections approach and policy decisions become more politically difficult.

A real interest rate is the borrowing cost after accounting for inflation. When it is very high, households face expensive loans and may postpone purchases. Businesses also delay investment because financing costs can make new projects unprofitable. Together, those choices reduce domestic demand, meaning less spending across the economy.

The same mechanism affects retail sales and banks. Customers have less appetite for loans, while existing borrowers face heavy financing costs. Banks then find it difficult to grow credit because demand is weak and lending carries greater repayment risks. S&P says credit volumes are shrinking because banks cannot easily expand lending at current high real interest rates.

Türkiye is already showing these effects. Domestic demand is weakening, retail sales are slowing, and credit growth is lower. SMEs and retail customers are struggling with extreme financing costs. S&P says next year could improve if monetary easing reaches loan pricing and lending, but the result depends on the timing and size of rate cuts.

S&P sees significant but manageable risks in Türkiye's banking system. One major concern is banks' sizeable external debt. Banks must keep rolling that debt over, meaning they need continued access to refinancing. Any disruption could create pressure for banks and affect confidence in the wider financial system.

A second concern is loan quality. High real interest rates make borrowing difficult, especially for SMEs and retail customers. Some borrowers may struggle to service existing loans or take on new financing. S&P therefore sees a potential basket of asset-quality risks in these groups. Shrinking credit volumes also show how strongly tight policy is affecting lending.

The outlook is not uniformly negative. S&P expects net interest margins to improve next year if lower rates quickly reduce lira funding costs. Foreign-currency funding costs could rise because of overseas interest-rate dynamics. The final result depends on rate cuts and the success of the disinflation program.

S&P's concern is that election pressures could weaken the tight policies supporting disinflation. If inflation progress stalls, investors may question whether the economic team can maintain discipline. That could make Türkiye's borrowing environment more difficult and weaken the policy progress underpinning its BB- rating. The article does not say that a downgrade is certain.

Banks would also face practical pressures. Persistently high rates could keep credit volumes shrinking and leave SMEs and retail customers struggling with repayments. Banks must also refinance sizeable external debt. If external funding becomes harder or more expensive, pressure on banks could increase. A weaker disinflation program could add to those concerns.

S&P currently considers the banking risks manageable and says disinflation is delayed, not derailed. The key test is whether tight monetary and macroeconomic policies remain sustainable through the election period. S&P will review Türkiye's rating in April next year, while elections are scheduled for May 2028 or possibly a few months earlier.

A sovereign credit rating evaluates the creditworthiness of a national government. It helps investors judge the risk of lending to that country. Türkiye's rating is BB- with a stable outlook. In practical terms, the rating summarizes S&P's view of the country's repayment risk and economic policy direction, rather than measuring one bank or company.

The rating matters because investors price government and other borrowing partly according to perceived risk. A lower rating generally means lenders demand higher interest rates to compensate for uncertainty. It can also narrow or make more expensive access to international finance. Those costs may affect the government, banks, and companies that borrow abroad.

S&P says Türkiye's rating is supported by progress since 2023 and tighter, more conventional policies. The stable outlook reflects that support, but upcoming elections are a test. S&P is monitoring whether monetary and macroeconomic discipline continues. It plans to review the rating in April next year, while its assessment broadly mirrors Fitch and Moody's.