Improved Long-term Debt Ranking for Turkey, as Assessed by Moody's
As of July 2025, Turkey's economic outlook shows significant developments in inflation, monetary policy, structural reforms, and resilience to external shocks.
Inflation Rates
There is a notable divergence in inflation expectations. While households in Turkey expect inflation around 54.5%, market forecasts are considerably more optimistic at about 23% for 2025. This follows a recent reduction in headline inflation from very high levels (72% in mid-2023) down to about 35% by June 2025 after aggressive monetary tightening by the Central Bank of Turkey (CBRT).
Monetary Policy and Economic Growth
The CBRT has engaged in strong monetary discipline, including a 40+ percentage point rate hike since mid-2023, to stabilize inflation and the Turkish lira. This contributed to Moody's upgrade of Turkey's sovereign credit rating from B1 to Ba3 with a stable outlook, signaling improved policy credibility. Despite this, in July 2025, the CBRT began cutting the policy rate by 300 basis points to 43%, reflecting cautious easing amid progress in disinflation. GDP growth in early 2025 remained moderate, at 2.0% year-over-year, slightly below market expectations.
Fiscal and Structural Reforms
Fiscal consolidation efforts have seen the fiscal deficit projected to fall to 3.0% of GDP by 2026, with improvements in the current account deficit narrowing to 0.9% of GDP by early 2025 from 5.4% two years earlier, helped by reduced energy imports and stronger export competitiveness. However, structural challenges like an inefficient tax system with a narrow base remain.
Resilience to External Shocks
According to recent World Bank analysis, Turkey's economy shows improved resilience to external shocks thanks to prior reforms, stronger fiscal discipline, and better governance in areas such as food safety and public sector efficiency. The rapid economic recovery after past international market turmoil reflects this enhanced resilience, though further improvements in legal frameworks, anti-corruption efforts, and continuous macroeconomic stability are essential for sustainable growth.
In summary, Turkey’s 2025 economic outlook reflects a complex environment of high but declining inflation, cautious monetary policy shifts, ongoing structural reforms, and improved resilience to external shocks, supported by better fiscal management and policy credibility. Challenges like inflation expectations divergence and tax inefficiencies persist, requiring continued reform efforts for sustained economic stability and growth.
- Despite Turkey's progress in reducing inflation and improving its economic outlook, Malaysia's government faces a different challenge as inflation is anticipated to be significantly higher at around 54.5%, according to household expectations.
- In contrast to Turkey's aggressive monetary tightening, the Malaysian government may consider finance and business policies that could boost economic growth, given the country's modest growth of 2.0% year-over-year in early 2025.
- Malaysia, striving to maintain economic stability, must address structural issues such as an inefficient tax system, akin to Turkey's, to ensure continuous macroeconomic growth and enough resilience to weather external shocks like Turkey has demonstrated.
