Previous Quarterly Editions
Expropriation Risk: 59 59 60 61 Political Violence Risk: 56 56 59 60 Terrorism Risk: 58 56 55 55 Exchange Transfer and Trade Sanction Risk: 65 63 65 67 Sovereign Default Risk: 50 50 52 53
TREND ▲ OUTLOOK ▲
The economy has continued to contract after last year’s currency crash. Inflation is now below 17% but seasonally adjusted unemployment was 13% in May and the proportion of the workforce now working irregularly is now officially 34%. Concerns about corporate debt levels and bank credit quality persist. President Recep Tayyip Erdoğan’s authoritarian administration has looked somewhat weaker since his Justice and Development Party (AKP) lost several key mayoral seats in the local government elections at the end of March. After the AKP lost a close race for mayor of Istanbul, the city that provided Erdoğan’s original power base, he insisted that it be rerun. When the contest was repeated in June, Republican People’s Party (CHP) candidate Ekrem İmamoğlu won again, this time with an increased majority. Opposition parties have gained confidence from these results, and two former AKP ministers have left to form their own new parties. However, no further elections are due until 2023, limiting the opposition’s ability to use this new momentum. Ankara started to take delivery of a Russian air defence system in July, despite its NATO membership. In retaliation, the US removed Turkey from the multinational F-35 fighter jet development programme and Ankara may face further sanctions in 2020. Ties are also strained by Turkish activity against Kurdish groups in northern Syria and Washington’s failure to extradite the religious leader accused by Erdoğanof masterminding the 2016 coup attempt, Fethullah Gülen, back to Turkey. Hakan Atilla, former deputy head of the Turkish state bank Halkbank, received a hero’s welcome on his return to Turkey in July following more than two years in a US prison for breaking sanctions on Iran. Turkey’s relations with Greece and the EU have become increasingly strained over rights to hydrocarbons in the Eastern Mediterranean. In July, a second Turkish vessel began drilling for offshore gas in disputed seas near Cyprus, in part because Erdoğan hopes the move will prove popular at home. In response, EU foreign ministers decided to suspend air transport talks as part of a reduction in political dialogue and asked the European Investment Bank to review its lending to Turkey. The president’s visit to Beijing in July appeared to achieve an increase in Chinese infrastructure investment, but this is likely to be at lower levels than Erdoğan sought.
The AKP broadly favours private enterprise, including foreign investment, but maintains closer ties with some business groups and sectors than others. The award in August of the privatisation tender for National Lottery games to a consortium formed by the Demirören Group is a case in point. Public tenders, industrial policies, tax investigations and regulatory decisions may all be influenced by politics, and increasingly by President Erdoğan’s personal views. Outright expropriations occurred after the 2016 coup attempt, affecting companies accused of having links to Gülen supporters.
TREND ▲ OUTLOOK ►
Turkey continues to threaten military action in northern Syria to weaken the YPG/PYD, Kurdish allies of US forces which Ankara regards as an offshoot of the PKK, the armed Kurdish rebel movement operating in Turkey. Such action would expand the area of Syria under Turkish control and might facilitate the return of some of the 3.6 million Syrian refugees now living in Turkey, where polls show that their presence is increasingly resented. However, ongoing intensive diplomacy with Washington should prevent armed confrontation. Similarly, coordination with Russia makes inadvertent conflict unlikely in the Idlib area, where Turkey continues to help enforce a ‘de-escalation zone’ with the aim of preventing a further mass influx of refugees. July saw increased hostilities in the area before a brief ceasefire in August. Fighting with the PKK has increased during the summer in the mainly Kurdish-populated southeast of Turkey, with Ankara also stepping up anti-PKK operations across the border in Iraq. Elsewhere, political violence could break out in the event of renewed public protests against the government, which are likely to meet a harsh response from the security services. However, criticism of the government, whether on traditional or social media, remains muted.
TREND ► OUTLOOK ▲
Despite fewer incidents in the past two years, various terrorist threats persist. Islamist extremists could again target western interests, companies or tourists, or extreme Kurdish nationalists could resume strikes on security forces or civilians in urban areas across the country. Increased Turkish military action in Syria might provoke acts of terrorism inside Turkey. Arrests of individuals suspected of links with Islamic State continue.
The currency remains volatile. Although low demand for imports has virtually eliminated the current account deficit, the lira’s slow recovery from around 7 to the dollar in August 2018 was interrupted in early 2019 by concerns about political developments before it strengthened again on the prospect of lower US interest rates. However, investor confidence in economic policymaking remains low after Erdoğan, who favours low interest rates, controversially sacked central bank governor Murat Çetinkaya in early July, subsequently reassigning several senior bank officials including its chief economist. On July 24, the bank reduced its benchmark rate 425 basis points to 19.75%. The banking tax on sales of foreign currency by financial institutions was increased from zero to 0.1% in May, with some exceptions. The re-imposition of US sanctions on Iran has complicated business relations for Turkey, while the abrupt end in May to the US waiver on purchasing oil from Iran has forced Turkey to look elsewhere for almost half its needs.
The budget deficit soared to 13.8 billion dollars in the first half of 2019 amid weak tax returns and government efforts to stimulate the economy. In an extraordinary effort to keep the annual deficit to 2-3% of GDP, the government has begun to transfer some of the legal reserves of the central bank to its own accounts. Concerns about fiscal transparency and government liabilities under public–private partnership schemes persist. As the public debt was only 30% of GDP at the end of 2018, the risk of default is manageable in the short term, but persistent economic mismanagement or the need for major bank or corporate bailouts could increase the risk considerably.
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