Previous Quarterly Editions
Expropriation Risk: 52 52 52 53 ► Political Violence Risk: 51 51 51 51 ► Terrorism Risk: 54 45 44 42 ▼ Exchange Transfer and Trade Sanction Risk: 55 55 45 45 ► Sovereign Default Risk: 47 47 47 47 ▼
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Government's commitment on climate policy Weakest 1 2 3 4 5 Strongest
Turkey ratified the Paris Agreement on Climate Change in October 2021, making it one of the last countries to do so. The government had delayed ratification on the grounds the United Nations Framework Convention on Climate Change should not treat Turkey as an industrialised country but as a developing country, implying fewer obligations. Turkey has now also set a target of 2053 for achieving net-zero carbon emissions. However, even while ratifying the Paris Agreement, parliament stated it would implement the agreement “provided it did not harm…economic and social development”.
Total greenhouse gas emissions reached 525 million tonnes of carbon dioxide equivalent in 2017, some 139% higher than in 1990, but fell to 506.1 million tonnes in 2019. This equates to 6.1 million tonnes per capita compared to the European Union average of 8.4. Energy accounted for 72% of the emissions. Emissions may have fallen in 2020 due to the coronavirus pandemic and risen in 2021 amid strong gross domestic product (GDP) growth.
There are policies for energy efficiency and renewable energy. In 2020, the share of hydroelectric power in electricity generation was 25.6% and the combined share of wind, solar, geothermal and biomass reached 16.9%. These policies are mainly driven by a desire to reduce dependence on imported energy sources, particularly natural gas. To this end, the government has also supported new coal-fired power plant projects.
Droughts and extreme weather events are among the consequences of climate change in Turkey. There were major forest fires and floods in 2021. Awareness is growing, and most major private companies are committed to reducing or eliminating their carbon footprints. However, climate change is low on the political agenda. The Greens Party remains marginal. National non-governmental organisation activity is limited.
The Justice and Development Party (AKP), in power since 2002, favours private enterprise, including foreign investment. This makes outright expropriation unlikely. The seizure of some companies linked to Fetullah Gulen after the 2016 Turkish coup attempt was exceptional. Nevertheless, public tenders have often gone to well-connected companies, while industrial policies, tax or anti-trust investigations and regulatory decisions may all be used to favour private groups close to the government or to hamper other groups.
The government has publicly accused top supermarket chains over rising inflation. State enterprises play an important role in some sectors. Energy and pharmaceuticals prices are controlled. The government is seeking to control the media and regulate social media. The judiciary is not independent.
All significant opposition parties also broadly favour a free market economy. However, the largest opposition party, the Republican People’s Party (CHP), plans to nationalise public-private-partnership projects, which it considers corrupt and damaging to public finances. After sharp increases in electricity prices and a blackout in the province of Isparta in January, the CHP also aims to re-nationalise power distribution.
The Russia-Ukraine crisis has made it all the harder for Turkey to juggle its longstanding relations with the U.S. and other NATO partners and its complex working relationship with Moscow. Indeed, Turkish President Recep Tayyip Erdogan has helped host talks between Ukraine and Russia, seeking a negotiated end to the conflict.
Russia is a major supplier of gas and wheat and an important market for some Turkish companies and sectors, including tourism. While condemning the conflict, Ankara is reluctant to adopt sanctions against Russia and will avoid becoming involved militarily, although it does supply arms to Ukraine.
The threat from the armed Kurdish opposition movement, the Kurdistan Workers’ Party (PKK), in the mainly Kurdish-populated south-east of Turkey, has largely been suppressed, although attacks on military and related civilian targets may recur. Turkey continues to claim successes in military operations against the PKK in northern Iraq, despite occasional casualties. There has been no sign of a return to large-scale civilian Kurdish insurgency in Turkey.
In Syria, fatal bomb and missile attacks have taken place in the northern enclaves controlled by Turkey and its Syrian opposition allies. These are attributed to the Kurdish-nationalist YPG (People’s Protection Units), which Ankara regards as an arm of the PKK, and which is influential in surrounding areas. U.S. support for the YPG, Turkey’s economic problems, its current policy of improving relations with other Arab countries and the Russian influence are likely to deter any initiative by Turkey to escalate the conflict.
Turkey continues to help monitor the ‘de-escalation zone’ in Idlib, Syria’s last radical opposition enclave. An eventual military push by Damascus and its allies could cause an escalated humanitarian and refugee crisis. Russia could use this threat against Turkey if it leans too far to the West over Ukraine.
In Turkey, there have been protests over the soaring cost of living, despite substantial increases in pensions and salaries for some groups. However, the opposition parties, which have gained in confidence, are focused on the presidential and parliamentary elections due in 2023, and mass civil unrest is highly unlikely, unless the elections are perceived as rigged.
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Turkey has experienced fewer incidents of terrorism in recent years, and none in recent months. Fears Kurdish nationalists could resume strikes on security forces or civilians in urban areas across the country, that Islamist extremists could again target Western interests, companies, or tourists, or that Syrian opposition groups could turn against Turkey with terrorist attacks, have not materialised. Arrests of alleged Islamic State activists continue to be reported, including the detention of its alleged leader in Turkey in December 2021.
Turkey’s limited foreign exchange reserves, perennial current account deficit and large public and private sector foreign debt (USD453.5 billion, 57% of GDP, as of September 2021) make Turkey vulnerable to foreign exchange shortages at times of low global liquidity. The lira is therefore very volatile. Nevertheless, the currency has been convertible for three decades and substantial foreign exchange controls have not been imposed.
GDP grew 11% in 2021. Even so, the economy became more unstable. In spite of rising double-figure inflation, the central bank cut its key policy interest rate from 19% to 14% between September and December 2021, leading to a sharp fall in the lira’s value, and pushing inflation to 54.4% by February 2022.
The lira remains under pressure due to the prospect of tighter U.S. monetary policy and the Russian-Ukraine crisis, with its negative effects on oil prices, trade and tourism. Turkey will seek to avoid imposing its own economic sanctions on Russia or incurring Russian sanctions.
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The weakness of the lira increases the strain on companies with foreign debts or local debts denominated in foreign exchange, and increases the risk carried by the lenders. This is also true for the government. The public debt-to-GDP ratio was only 37.6% of GDP as of September 2021, but this figure is set to increase due to the subsequent exchange rate depreciation.
In 2022, moreover, the public finances could deteriorate due to rising prices, a rising wage bill, high international borrowing costs, the costs of recapitalising state banks, the potential costs of guaranteeing bank deposits against foreign exchange losses, and weaker tax revenues due to a slower economy and tax reductions made to help combat inflation and offset the costs of higher wages to employers. The budget law envisages a central government budget deficit of 3.5% of GDP, up from 2.7% in 2021.
While there is no immediate risk of sovereign debt default, persistent economic mismanagement or the need for major bank or corporate bailouts could worsen the debt situation considerably. There are also concerns about fiscal transparency, including public-private partnership infrastructure projects and the Turkish Asset Fund, the sovereign wealth fund that owns most state enterprises.
