Moody's Review of Turkey: Slowing Growth, Inflation Pressures and Widening Current Account Deficit

Moody's completed its periodic credit review of Turkey, releasing striking forecasts for 2026 growth, inflation and current‑account deficit.

Growth Dynamics: Slight Deceleration, Election‑Year Stimulus

Moody's projects that the real growth rate, which stood at 3.6% in 2025, will ease to 3.4% in 2026, but expects a rebound in 2027 driven by fiscal stimulus ahead of the presidential and parliamentary elections.

■Real growth: 3.4% (2026) → 3.6% (2025) slowdown

■Anticipated acceleration in 2027 due to election‑year fiscal measures

Inflation and Monetary Stance: Maintaining Tight Policy

Inflation is forecasted at 29% for 2026, above prior estimates, and to decline to 24% by the end of 2027. The Central Bank’s policy rate remains at 40%, while the dollarization ratio holds steady around 38%.

■Inflation: 29% (2026) → 24% (2027)

■Policy rate: 40%

■Dollarization: 38%

Current‑Account and FX Reserves: Energy Bills and Trade Imbalance

Moody's notes that higher energy import costs and weaker exports will widen the current‑account deficit from 1.9% of GDP in 2025 to 3.5% in 2026, though a drop in oil prices could narrow the gap in 2027. As of mid‑July, total reserves stand at $160 billion, with net reserves (excluding swaps) at $38 billion.

■Current‑account deficit: 1.9% (2025) → 3.5% (2026)

■Total reserves: $160 billion

■Net reserves (ex‑swap): $38 billion

Fiscal Deficit and Fiscal Health: Sliding Scale Tax Mechanism and Spending Pressure

The central government’s fiscal deficit fell from 4.7% of GDP in 2024 to 2.9% in 2025, but the sliding‑scale fuel tax mechanism is expected to push the deficit to 3.5% in 2026, with election‑time spending pressures potentially raising it to 4% in 2027‑2028.

■Fiscal deficit: 4.7% → 2.9% → 3.5% (2026) → 4% (2027‑28)

■General government debt‑to‑GDP: 23.7% (low level)

Liquidity and Capital Flows: Short‑Term Outflows' Impact on Reserves

Short‑term capital outflows triggered by the Middle‑East conflict during March‑April 2026 caused heightened volatility in reserves over 12‑18 months, affecting a portion of the $160 billion total reserves.

Turkey’s macro‑stability is being tested by high inflation and a widening current‑account gap. As Moody’s underscores, the sustainability of election‑year fiscal stimulus and the dynamics of the sliding‑scale fuel tax will be pivotal for preserving fiscal balance. A tight monetary stance will help temper reserve volatility, but accelerating structural reforms remains essential to achieve long‑term growth objectives.