Index Trend Previous Quarterly Editions
Expropriation Risk: 59 Political Violence Risk: 60 Terrorism Risk: 56 Exchange Transfer and Trade Sanction Risk: 68 69 Sovereign Default Risk: 56
Risk Temperature 61 (Medium-High) +1
TREND ▲ ▲
Although the government faced challenges on a wide range of fronts during the first quarter of 2020, including ongoing tensions with Washington over arms purchases, European objection to Ankara’s actions in Libya, and the formation of two new political parties by defectors from the ruling Justice and Development Party (AKP), two crises overshadowed all else during the first months of 2020. One was the conflict around Idlib in Syria, and the migrant moves that it has triggered, and the other was the spread of COVID-19. The advance of Russian-backed Syrian forces into the greater Idlib area, the last stronghold of the Syrian rebels and nominally a “de-escalation zone” since 2017, caused hundreds of thousands of civilians to flee towards the Turkish border. It also left several Turkish military observer posts as islands in Syrian government-held territory. Ankara accused Syria and Russia of failing to abide by the 2017 accord while they in turn blamed Ankara for not disarming radical Islamist groups fighting out of Idlib or ensuring the safety of key highways. Turkey increased its support for the Free Syrian Army, the rebel faction it supports, and demanded Syrian forces pull back. When 33 of its soldiers were killed in a single incident in late February 2020, Turkey responded by ceasing to prevent Syrian, Afghan and other refugees and migrants on its territory from trying to enter Greece by land. Ankara used the move to underline its frustration at what it regards as inadequate European assistance in coping with the 3.5 million Syrian refugees now in Turkey. In early March 2020, Presidents Erdoğan and Putin agreed a new ceasefire line which Turkey and Russia will police jointly. Even as these helped with the Idlib crisis, the COVID-19 outbreak was moving more quickly than Ankara anticipated. Given its limited trade with China, Turkey initially expected to avoid the worst impact of the virus, but the flight bans and border closures instituted in mid-March 2020 were quickly followed by more stringent social distancing measures that closed schools and universities, non-essential retail outlets, places of entertainment, and bars, cafes and restaurants other than for takeout service. All sporting events were cancelled, as were communal prayers in mosques. Government employees and others were told to work from home if possible and those over 65 suffering from chronic conditions were prohibited from going outdoors. A later move to extend that order to those under 20 was quickly rescinded when the importance of the wages brought home by those aged 18-20 became clear. The health system cancelled routine services and concentrated on virus cases. The economic impact has been particularly frustrating for the government given strong year-on-year growth of 6% in the final quarter of 2019, bringing annual growth up to almost 1%, a strong showing that had carried over into the early weeks of 2020. By April 2020, the IMF was predicting a contraction of 5% for 2020. The measures to deal with the virus have seriously affected domestic consumption and production, as well as export demand and tourism revenue. President Erdoğan announced a support package worth 15 billion USD in March 2020, while blaming the West for the spread of the virus, by an increase in state guarantees for borrowing by small and medium-sized enterprises that have also been extended to households, but more will surely be needed. President Erdoğan’s antipathy to the IMF will continue to rule a major support package with conditions attached, but the country may need to consider a less conditional short-term credit line with the Fund at some point.
Turkey increased its support for the Free Syrian Army, the rebel faction it supports, and demanded Syrian forces pull back."
Expropriation Risk 59 ( Significant ) TREND ► ►
The AKP favours private enterprise, including foreign investment. Outright expropriation is not part of its policy, although some occurred after the 2016 coup attempt involving companies linked to the Fetullah Gulen movement, which President Erdoğan blamed for the uprising. The party maintains closer ties with some business groups and sectors than others, and public tenders, industrial policies, tax investigations and regulatory decisions could all be influenced by politics.
Political Violence Risk 60 ( Medium-High) TREND ▲ ►
Turkey could resume its incursions against the Kurdish nationalist YPG in northern Syria or once again become engaged in warfare in Idlib, where Damascus aims to restore its sovereignty. Recent developments suggest that coordination with Russia will limit any fighting but not necessarily prevent the possibility altogether. Military activity against the Kurdish nationalist PKK in southeast Turkey, and across the border in Iraq, continues on a relatively small scale for now. However, five Kurdish mayors of municipalities in the south-east were detained in late March 2020 in an apparent attempt to distract attention from the COVID-19 outbreak. Another coup attempt similar to that in 2016, or a repeat of the mass civil unrest of 2013, are both highly unlikely in the short or medium term.
Terrorism Risk 56 (Significant) TREND ► ►
Although Turkey has experienced fewer incidents of terrorism in recent years, it remains possible that Kurdish nationalists could resume strikes on security forces or civilians in urban areas across the country, or Islamist extremists could again target western interests, companies, or tourists. Alleged members of Islamist extremist groups are quite frequently arrested: another 14 Islamic State suspects were reportedly detained in Ankara and Izmir in late December 2019. Possible Turkish military action against extremist groups in Idlib could provoke retaliatory terrorist attacks in Turkey.
Exchange Transfer and Trade Sanctions Risk 69 (Medium-High) TREND ▲ ▲
The lira has been convertible for three decades and capital controls are minimal, but the currency is notoriously volatile. The Idlib conflict and coronavirus fears combined to cause the lira to weaken from February 2020 onwards to below 6.50 in early April 2020. Its 10% fall during the first quarter was close to the overall fall during 2019. The lira could weaken further as the cost of the virus mounts, especially if the central bank continues its series of interest rate reductions after the March 2020 cut to 9.75%; it is already lending to banks at below that rate. However, monetary policies have also loosened globally. Moreover, the current account showed an unusual surplus of 1.1% of GDP in 2019 and the anticipated deficit in 2020 will be curbed by the virus-related slowdown, tumbling oil prices and the weak lira.
Sovereign Default Risk 56 (Significant) TREND ▲ ▲
The budget deficit for 2019 rose from 2% to 2.9% of GDP despite the use of central bank reserve funds to make up for sagging revenues, and it will inevitably rise again this year. Meanwhile, concerns about fiscal transparency, public-private partnership schemes and the use of state banks for policy purposes persist. The debt-to-GDP ratio is still only around 33%, meaning that the risk of default is manageable in the short term, but a prolonged virus crisis, persistent economic mismanagement or the need for major bank or corporate bailouts could increase it considerably in the medium term.
