Index trend
Previous Quarterly Editions
Expropriation Risk: 56 ► Political Violence Risk: 57 ► Terrorism Risk: 42 ▼ Exchange Transfer and Trade Sanction Risk: 45 ► Sovereign Default Risk: 56 ►
Overall Risk Temperature: 54 (Medium) ►
Special topic:
After a brief attempt to ’normalize’ relations between the government and the opposition in mid-2024, elite polarization in Turkey is back with a vengeance, owing to the government’s renewed crackdown on opposition officials and outspoken critics.
Istanbul Mayor Ekrem Imamoglu, seen as the strongest challenger to President Recep Tayyip Erdogan, was arrested in March on corruption charges, shortly after his university diploma — a constitutional prerequisite for running for president — was revoked over alleged irregularities. The move is widely seen as an attempt by Edrogan to knock his main rival out of a future presidential race, as the main opposition Republican People’s Party (CHP) was set to confirm Imamoglu as its presidential nominee. Imamoglu’s arrest kicked off the largest street protests in Turkey since 2013. The protesters and the CHP have vowed to continue on fighting, but Erdogan has warned that he will respond decisively to unrest.
Erdogan’s apparent intention to secure another term, despite reaching the constitutional term limit, will therefore be the main driver of polarization in Turkey for the foreseeable future.
Several other Istanbul district mayors and lower-level officials from the CHP have also been detained and investigated, either for suspected corruption or for alleged dealings with the outlawed Kurdistan Workers’ Party (PKK). The government has continued its practice of arresting pro-Kurdish Peoples’ Equality and Democracy Party mayors, on accusations of being PKK members, and replacing them with government-appointed trustees. Among government critics, these moves are largely seen as part of an effort to roll back the results of the March 2024 local elections — which saw Erdogan’s party lose to the CHP — through undemocratic means, highlighting that democracy and the government’s authoritarian tendencies remain a major fault line in Turkish politics.
Polarization between the government and the business elite is increasing as well. Two figureheads of the Turkish Industry and Business Association have been arrested, indicted for ’spreading disinformation’ and banned from traveling for criticizing the government’s crackdown on the opposition, amid Erdogan’s warning that the business community should stay out of politics.
Ideological polarization remains present between adherents of Islamism, prevalent mostly in rural areas, and the secular urban population. Though the two groups rarely see eye to eye on most issues, the position of women in Turkish society and the rights of sexual minorities stand out among key ideological dividing lines.
Several high-profile cases of femicide last year have led to widespread anger, forcing the government to respond and reigniting discussions over women’s rights. A report by a women’s rights group claimed that last year was record-breaking in terms of femicides, with almost 400 confirmed cases, implying widespread impunity and government rhetoric are to blame. Critics see the government’s conservatism and courting of right-wing groups as enabling misogynist sentiment to flourish.
Erdogan has also declared 2025 to be the “Year of the Family,” aiming to spur demographic growth by, among other things, cracking down on “perverse ideologies.” Turkey’s Directorate of Religious Affairs also implicitly targeted sexual minorities in its Friday sermons. In the March 2024 local elections, the Islamist New Welfare Party nearly doubled its voter base compared with the 2023 parliamentary elections, largely on the back of a campaign that was hostile to feminism and sexual minorities.
The two groups are also at odds over Turkey’s past and future. In January, the defense ministry dismissed five fresh military academy graduates who praised Turkey’s founding president and staunch secularist, Mustafa Kemal Ataturk, during their oath ceremony, after they were publicly targeted by Erdogan. Erdogan is also seeking a clean break with the past by attempting to pass a ’civilian’ constitution. If its provisions try to enshrine elements of Islamist doctrine, in addition to abolishing presidential term limits, that may anger the secular urban population. Members of the ‘out-group’ are rarely seen as legitimate interlocutors by either side, as demonstrated when the opposition-aligned Halk TV faced a backlash after platforming a pro-government figure.
Ankara’s cautious outreach to jailed PKK leader Abdullah Ocalan, and the latter’s recent call on the group to disarm and dissolve, could potentially bode well for ethnic relations between Turks and Kurds. Still, the ‘peace process’ is highly unpredictable and is causing some resentment among the Turkish nationalist fringe. A potential breakdown of the process could inflame ethnic tensions once again.
Dynamics in Syria may also influence polarization in Turkey. The recent reported targeting of the Alawite community in Syria by forces backed by Damascus and Ankara raised some fears among Turkey’s Alevi community (which is not directly related to Alawites). Ankara’s support for the Syrian government and its actions exposes Turkey’s delicate ethnic composition to instability. Moreover, many Turks expect the sizeable Syrian refugee population (estimated at more than 3 million) to return to Syria after the ouster of former President Bashar al-Assad. Failure to make progress on this could see anti-refugee riots reoccur.
Expropriation Risk 56 (Significant) TREND ►
A broad consensus on private enterprise and foreign investment makes outright expropriation a very distant prospect. Although some companies were seized after the 2016 coup attempt, and complaints arise over land nationalization for infrastructure and housing projects, foreign companies have not been affected.
Nevertheless, the government is not averse to using regulations and the judiciary to pursue political ends. This can affect the value and profitability of domestic and foreign companies. Two high-ranking officials from the Turkish Industry and Business Association — the membership of which accounts for 85% of Turkey's foreign trade and contributes 80% of corporate tax revenue — were handed travel bans and had a probe opened against them for ’misleading statements’ in February 2025. The two officials had criticized government policies earlier in the month.
Furthermore, foreign investors may face unfair competition from state enterprises or competitors receiving favorable treatment — for example, in the implementation of industrial policies.
Political Violence Risk 57 (Significant) TREND ►
The pre-emptive strikes by the U.S. and Israel against Iranian nuclear capabilities may provoke Iranian retaliation against countries in the region. Israel is hardened against air assault, and Iran may wish to expend its dwindling supply of missiles against targets where its strikes will be more effective - both because these targets lack Israel's multiple rings of anti-missile defenses, and because most of these targets are closer to Iran, with proximity implying defenders will have less of a chance to respond. Iran's goal in this case would be to cause sufficient disruption to make the U.S. question its continued involvement in the conflict. These disruptive efforts could in the first instance involve efforts to close the Straits of Hormuz to shipping; possibly involve attacks on US bases in Iraq, Jordan, Syria, Qatar, and elsewhere (although such attacks might provoke an escalation of US involvement); and possibly involve attacks on oil and gas and other critical infrastructure in the wider Middle East, most likely in Qatar, Saudia Arabia, and the UAE (although such attacks would risk bringing other regional militaries into the war). Turkey, a contender for regional dominance in its own right, is not expected to be a target, but it does host a significant U.S. military presence.
Threats of political violence from PKK fighters have fallen sharply in recent times. On March 1 this year, the group declared a unilateral ceasefire and expressed willingness to disarm. This followed a call from the PKK’s imprisoned leader Abdullah Ocalan to lay down its arms. The government’s response to the declaration has been muted, and the authorities have continued to crack down on Kurdish officials and politicians. As a result, a return to violence remains a possibility.
Furthermore, Ankara maintains a military presence and conducts land, air and intelligence operations against the PKK in northern Iraq and northern Syria. However, Ankara’s support for President Ahmed al-Sharaa’s overthrow of the Assad regime may see fighting with the PKK in northern Syria decrease. Meanwhile, relations with the government in Baghdad have strengthened over the past year.
Despite the 50-year stalemate in Cyprus, multiple disputes with Greece and occasional hostile rhetoric, the risk of a military confrontation between Turkey and Greece or Cyprus is minuscule.
Terrorism Risk 42 (Medium low) TREND ▼
Terrorist incidents have dwindled in recent years. In February 2024, a civilian was killed in a shoot-out with members of the remnant leftist Revolutionary People’s Liberation Party organization outside an Istanbul court. The PKK claimed responsibility for an attack on October 23, 2024, on the headquarters of Turkish Aerospace Industries in which seven people were killed, including the two attackers, and 22 injured. Such incidents could recur occasionally.
The threat from the Islamic State remains, especially if the group takes advantage of insecurity in Syria. Alleged Islamic State activists are frequently detained. The group claimed responsibility for a shooting during a church service in Istanbul in January 2024, in which one civilian died.
Exchange Transfer and Trade Sanctions Risk 45 (Medium) TREND ►
Turkey has a perennial current-account deficit and high foreign debt servicing costs. However, the risk of currency controls being introduced in response to a balance of payments crisis has eased significantly with the ‘normalization’ of monetary policies since mid-2023.
In its efforts to control runaway inflation, the central bank raised its policy rate from 8.5% to 50% between June 2023 and May 2024. As inflation has fallen and the current account deficit has narrowed, interest rates have started to fall. The benchmark rate now stands at 42.5% and will fall further in 2025. However, the risk remains that political and business pressure could result in interest rates falling too rapidly, potentially undermining investor confidence and raising risks.
Turkey has attracted external finance, including bank borrowing, government bond issues, and inflows to the capital and money markets. Domestic demand for foreign exchange as a savings instrument has declined. The volume of lira-denominated ’exchange-rate protected’ bank accounts carrying state guarantees against exchange rate losses has shrunk to almost zero. Nevertheless, long-term foreign direct investment flows remain muted.
At the end of February 2025, central bank foreign exchange reserves excluding gold stood at $100.7 billion compared with a low point of $56.5 billion in May 2023. Annual consumer price inflation has fallen for nine consecutive months to 39.1% in February 2025 from 75.5% in May 2024. Depreciation of the lira is now moderate, but the speed of depreciation could increase if interest rates fall too rapidly.
Uncertainty over the direction of U.S. President Donald Trump’s unpredictable economic policies and his use of sanctions as a political weapon means that exchange transfer and trade sanctions risks could increase sharply.
Sovereign Default Risk 56 (Significant) TREND ►
The risk of a sovereign default has decreased in line with the adoption of monetary normalization. In recognition of the improved position, international credit rating agencies upgraded Turkey’s credit ratings during 2024, though they remain below investment levels.
Government debt was less than 30% of GDP at the end of 2024. Persistent fiscal deficits, lira weakness or lower economic growth would increase this ratio — but not to risky levels in the medium term.
However, the lack of independence of the central bank remains a concern for the markets, and public finances are not fully transparent. The central government budget deficit averaged over 5.0% of GDP in 2023 and 2024, partly driven by expenditure related to earthquakes in February 2023. In its Medium-Term Program published in September 2024, the administration is now optimistically targeting a gradual reduction in this deficit to 2.5% by 2027.
