Turkiye 5-year credit risk premium hit its lowest level since February 2020

The economic policies pursued by the economic management for about a year are yielding results.

Lately, international credit rating agencies have been upgrading Turkey’s credit rating, and interest in Turkish lira assets continues to rise. This situation positively affects Turkey’s risk premium, while the improvement in funding costs is also noticeable.

Turkey’s 5-year credit risk premium (CDS) dropped to 276 basis points, the lowest level since February 2020. Thus, the CDS has returned to the pre-COVID-19 pandemic level.

The decline in CDS, which also reflects the international investors’ interest in Turkish lira assets, continues along with the positive evaluations of credit rating agencies, the determined steps of the economic management towards establishing disinflation, and the signals indicating Turkey’s ongoing access to external financing.

Analysts expressed that the news flow suggesting steps taken by Turkey to open foreign swap channels has been influential in this movement.

Regarding the demand for Turkish lira assets, Treasury and Finance Minister Mehmet Şimşek stated that the increasing confidence and predictability towards the Turkish economy also positively affect securing external financing. He stated, “While there was a net portfolio outflow of $2.9 billion in the first 5 months of 2023, there was a net portfolio inflow of $16.8 billion between June 2023 and February 2024.”

Positive signals continue to come from credit rating agencies Standard & Poor’s (S&P) upgraded Turkey’s credit rating from “B” to “B+” last week. In its assessment, S&P noted that coordination between monetary, fiscal, and income policies is expected to improve in Turkey following the impact of external rebalancing after local elections, anticipating increased portfolio inflows over the next 2 years, narrowing current account deficits, and expecting a decrease in inflation and dollarization.

Fitch Ratings also upgraded Turkey’s credit rating from “B” to “B+” at the beginning of March, and changed the outlook from “stable” to “positive.”

While Moody’s reaffirmed Turkey’s credit rating as “B3” earlier this year, it changed the outlook from “stable” to “positive.”

Analysts forecast that if a sustainable slowdown in inflation and a decrease in the current account deficit occur in the coming period, Moody’s could raise Turkey’s credit rating in its evaluation on July 19.

source: prepared by Melisa Beğiç

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