Türkiye: Political Uncertainty Clouds Inflation Outlook, Further Policy

A more pronounced economic slowdown also increases the risk that fiscal policy remains expansionary, challenging the government’s ability to reach its objective of a primary fiscal balance by 2026.

Scope expects a budget deficit of about 3.6% of GDP in 2025 and in 2026, and a general government debt-to-GDP ratio of 26%.

External and Financial Risks Remain Significant

The Turkish economy is more resilient than it was a few years ago and can accommodate some volatility, due to higher international reserves and more effective macroeconomic policies, which have eased the strains on public and private-sector balance sheets.

Non-resident holdings rose to more than 10% of government debt in January 2025, up from 2% in January 2024. Net assets of the CBRT, excluding foreign-currency swaps with commercial banks, have reached multi-year highs of more than USD 40bn.

However, Türkiye’s BB- ratings reflect prominent external and financial risks, as reflected in downward pressures on the net foreign positions of local banks. Local banks’ balance sheets could deteriorate if they are called on by the authorities to continue supporting the local currency.

If sustained over a prolonged period, the interventions of the CBRT to contain the depreciation of the lira will also erode its reserves and lower resilience against future external shocks. This could reduce confidence in lira-denominated assets and encourage higher dollarisation.

Although Türkiye’s public finances have proven to be resilient to domestic political uncertainty in the past, the sovereign’s rating trajectory remains vulnerable to the challenging macroeconomic conditions and sudden shifts in domestic economic policy.

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Thomas Gillet is a Director in Sovereign and Public Sector ratings at Scope Ratings GmbH.