Turkey's credit rating remains tied to a delicate balancing act: keeping inflation under control while navigating a political calendar that could test the central bank's resolve. That's the message from S&P Global Ratings, which reaffirmed Turkey's BB- rating and stable outlook, but flagged the run-up to the next elections as a key risk.
In an interview with Reuters, S&P analysts acknowledged that Turkey has made "significant progress since 2023" by shifting away from years of cheap credit and growth-first policies toward higher interest rates designed to cool price rises. However, inflation is still running just under 30%, and the pace of cooling has been slower than hoped, partly due to energy costs and other shocks.
The central bank's recent decision to cut its policy rate to 36%—after holding at 37% for five meetings—has drawn particular attention. Investors are watching to see whether this marks the start of a consistent easing cycle that stays aligned with the inflation fight, or whether it signals a pre-election loosening that could undermine the policy reset.
Why the rate cut matters
Turkey's central bank began raising rates sharply in mid-2023, reversing years of unorthodox policy that had fueled inflation and currency depreciation. The shift was widely welcomed by investors, but the path back to price stability has been bumpy. Inflation has fallen from much higher levels, but it remains stubbornly high, and the recent rate cut—the first in months—has raised questions about the central bank's independence and priorities.
S&P's warning is essentially about credibility. For sovereign bond investors, credibility shows up in the extra yield they demand to lend to Turkey in hard currency. If tight policy looks durable, worries about renewed inflation, currency stress, and policy swings fade, and credit spreads can narrow. If politics starts pulling policy in the other direction, that premium can widen quickly, lifting eurobond yields and raising the government's refinancing costs.
Because the sovereign risk premium often sets the tone for the rest of the economy, wider spreads can also filter into funding conditions for banks and big companies. That's why the rating agency's next review, scheduled for April, is a key checkpoint. Markets often adjust before the rating itself changes.
The political calendar
The real test, according to S&P, will be the run-up to presidential and parliamentary elections scheduled for May 2028—though officials have said they could be held a few months early. As campaigning draws closer, pressure may build on the central bank to support growth, especially if inflation is still near 30% and voters are feeling the pinch of high prices.
This is not a new dilemma for Turkey. In the past, election cycles have often coincided with looser monetary policy, which eventually led to currency crises and even higher inflation. The current policy reset is an attempt to break that pattern, but it requires political will to stay the course.
For now, S&P's stable outlook suggests the agency believes the reset can hold. But the warning is clear: the commitment to tight money will be tested, and the outcome will shape Turkey's borrowing costs and economic stability for years to come.
What it means for investors
For everyday investors, the key takeaway is that Turkey's financial health is still a work in progress. The BB- rating—below investment grade—means Turkish bonds are considered speculative, and the stable outlook offers some reassurance but no guarantees.
If you hold Turkish assets or are considering them, the April review is a date to watch. A downgrade could raise borrowing costs for the government and companies, while a reaffirmation—or an upgrade—could boost sentiment. But the bigger picture is political: the approach to the 2028 elections will likely determine whether the policy reset survives.
For those with broader emerging market exposure, Turkey's situation is a reminder that political risk can quickly translate into market risk. As seen in other episodes, emerging markets can slide when investor confidence is shaken, and Turkey's fate can ripple across the asset class.
In the meantime, the central bank's next moves will be scrutinized. A rate cut that looks like a one-off to support growth could be tolerated, but a sustained easing cycle before inflation is firmly under control could reignite currency pressure and push prices higher again. That's the tightrope Turkey is walking, and S&P is watching every step.
