Previous Quarterly Editions
Expropriation Risk: 56 57 57 57 ►Political Violence Risk:57 57 57 57 ►Terrorism Risk:40 38 38 42 ►Exchange Transfer and Trade Sanction Risk: 54 54 54 54 ►Sovereign Default Risk:56 65 65 65 ►
TREND ►
Protest intensity to date* 2022 2023 High Very HighUnrest risk in 2024**Cost of living: MediumAnti-austerity: High
*Note: Protest intensity is calculated based on ACLED. **Risk levels are calculated by WTW. Where data are missing no risk level will be displayed. For details of 'anti-austerity' calculations, see the essays in the introduction; for details of 'cost-of-living' calculations, see the previous edition of the Index.
At US$475.8 billion, or 46.5% of GDP, Turkey’s gross external debt was of normally manageable proportions as of June 2023, according to the Ministry of Treasury and Finance. Over 49% of the debt is owed by private companies and banks, 41% by the public sector (mostly central government, followed by state banks) and 10% by the central bank.
The growth of the debt has slowed since 2018, partly due to some regulatory curbs on foreign borrowing by private companies. Only 12% of the gross foreign debt is held by official creditors.
The Ministry puts the net external debt, found by deducting bank and central bank external assets from the gross debt, at only US$267.7 billion (26.2% of GDP); however, the debt burden and potential risk of default are aggravated by several factors.
As a net importer of many goods, including energy raw materials, Turkey also runs large current account deficits. First, external finance is needed to finance these deficits as well as to service the external debt. Second, foreign reserves are relatively low, borrowing costs relatively high and maturities relatively short. According to the Ministry, US$33 billion of external debt and interest fell due in August to December 2023. Finally, the Turkish lira (TRY) is volatile, and the debt-to-GDP ratio rises sharply at times of lira weakness.
Governments are often reluctant to tighten fiscal and monetary policies to reduce borrowing needs and the current account deficit. Between 2021 and the presidential and parliamentary elections of May 2023, President Recep Tayyip Erdogan insisted on low central bank interest rates, despite soaring inflation, and adopted populist measures to win the election. Fears that these policies would continue led to concerns about a possible debt default amid rising risk perceptions.
In the event, upon holding power, Erdogan appointed new economic management who have started to implement tighter and more orthodox policies; however, the president’s commitment to such policies is uncertain. Meanwhile, the expansionary pre-election policies and the costs of the February 2023 earthquakes have increased public spending.
Dependence on external finance affects foreign policy. International financial confidence depends partly on good relations with the West, yet there are many bones of contention, and frictions have sometimes been fanned by the use of nationalist issues to win domestic political support. Recent efforts to diversify sources of finance through agreements with non-Western countries — so far, mostly oil producers headed by Qatar, the United Arab Emirates and Saudi Arabia — have borne limited fruit and may also require (potentially less transparent) political or economic concessions.
Turkey has a long history of honoring its debts. Not doing so would undermine the country’s ability to meet its financing needs and maintain stability and growth. The idea of a moratorium and restructuring of foreign debt has occasionally been raised in some opposition circles, but public opinion would perceive any debt default as shameful and a sign of government mismanagement. For these reasons, the government will not willingly default and may well seek to prevent private sector defaults.
There is a broad consensus on private enterprise and foreign investment, making outright expropriation unlikely (though some companies were seized after the 2016 coup attempt in Turkey); however, public tenders, industrial policies, tax or anti-trust investigations, regulatory decisions, state bank loans and land allocation or privatization decisions may favor pro-government businesses. State enterprises may create unfair competition.
Kurdistan Workers’ Party (PKK) fighters now pose little threat in the mainly Kurdish-populated southeast of Turkey. There are no signs of renewed large-scale civilian Kurdish insurgency. Ankara says its latest operation against the PKK in mountainous areas of northern Iraq, “Claw and Lock,” launched in April 2022, has “neutralized” more than 600 “terrorists.” Turkish forces have suffered dozens of casualties. Such operations and other Turkish strikes in Iraq will continue. More air strikes followed the terrorist attack in Ankara on October 1, 2023.
Turkey controls enclaves in northern Syria where it faces off against the U.S.-allied People’s Protection Units (YPG), seen as an arm of the PKK. Here too, operations were stepped up after October’s terrorist attack in Ankara. In agreement with Russia, Ankara is also helping to protect the opposition stronghold in Idlib from possible Syrian government assault. Large-scale hostilities remain unlikely due to international pressures on all sides, although rapprochement with Damascus has stalled.
Far fewer terrorist incidents have occurred in recent years. A bomb explosion blamed on the PKK killed six civilians in Istanbul in November 2022, but fears of further similar incidents before the 2023 elections did not materialize. Arrests of alleged Islamic State activists continue.
On October 1, 2023, there was an explosion outside the Interior Ministry in Ankara, opposite the Houses of Parliament. The PKK is being blamed and reportedly had claimed responsibility anyhow. The government says the attackers have been identified as PKK members and that the incident was a suicide bomb attack. Two police officers were slightly injured. Pending further details, however, there is no specific reason to believe that this is the start of a new campaign or wave of terrorism that could target civilians or businesses. Nonetheless, it is a reminder of the risk.
Since elections in May 2023, the authorities have started to reverse policies that had increased the risks of foreign currency shortages and capital controls; however, the lira remains volatile.
The central bank raised its policy rate from 8.5% to 30% between June and September 2023 as well as took other measures to encourage savings and control credit. This process may help lower the current account deficit in 2024 after another 5%-of-GDP deficit in 2023.
The lira was allowed to depreciate from under TRY20 to the U.S. dollar before the 2023 elections to TRY26 to TRY27 from July onward and just under TRY28 in early October. Reducing support for the lira helped steady the foreign exchange reserves (US$81.6 billion gross excluding gold on September 29); however, currency depreciation and post-election price and tax increases pushed consumer price inflation to 61.5% in September.
The state continues to provide guarantees against exchange rate losses to holders of over US$120 billion worth of lira-denominated “exchange-rate protected” bank accounts (otherwise known as KKMs).
Turkish banks and companies dealing with Russia have avoided U.S. sanctions, but these could yet be applied more stringently.
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There is a modest risk of an eventual sovereign default. The government debt was only 34% of GDP in June 2023, but persistent fiscal deficits and lower economic growth would increase this figure. Lira-denominated debt is being eroded by inflation and low interest rates, but the weak lira is increasing the costs of foreign-currency debt servicing and guarantees to public-private-partnership projects. Banks and companies may need support in the future. Moreover, public finances are not fully transparent.
The government’s Medium-Term Program published in September 2023 anticipates much-increased budget deficits of 6.4% in both 2023 and 2024, despite increases in corporation tax and value-added tax in July. These projections reflect earthquake spending and expansionary policies (pay and pensions increases, early retirement opportunities and the like) followed in the run-up to the May 2023 elections.
