Index Trend Previous Quarterly Editions
Expropriation Risk: 57 ▲ Political Violence Risk: 57 ► Terrorism Risk: 38 ▼ Exchange Transfer and Trade Sanction Risk: 54 ► Sovereign Default Risk: 65 ▲
Overall Risk Temperature TREND ▲
Special topic: Protest intensity in 2022 and Q1 2023* 2022 Q1 2023 Low Low All protest: Medium Very High
Cost-of-living protest risk in 2023* - 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 calculations, see the introductory essay.
Consumer price inflation was 55.2% in February 2023, down from 85.5% in October 2022. Besides the expansionary response to the COVID-19 pandemic and the impact of the Russia/Ukraine crisis on commodity prices, high inflation reflects the rapid depreciation of the lira in late 2021, after orthodox monetary policies were jettisoned and interest rates slashed (all interest rates remain deeply negative in real terms).
Meanwhile, inflation has surged despite natural gas and electricity subsidies and some indirect tax cuts. Energy subsidies take various forms including state enterprise losses. Treasury Minister Nureddin Nebati has said energy subsidies will cost TL530 billion (perhaps 2% of GDP) in 2023.
The current account deficit reached 5.4% of GDP in 2022, owing to high prices for key imports. Net capital inflows barely sufficed to finance this deficit. Pressure on the lira continues, with further risks for inflation and the cost of servicing the public/private foreign debt (53% of GDP).
In spite of these challenges, the government has not adopted austerity measures. Increases in public sector pay, pensions, and the minimum wage have compensated or over-compensated, albeit retrospectively, for inflation. The government is also using subsidized housing schemes, an early retirement law, and other policies to maintain GDP growth (5.6% in 2022), curb unemployment (10.4%), and create a ‘feel-good factor’ ahead of presidential and parliamentary elections, scheduled for May 14.
Even so, rising prices have caused hardship for those unable to increase their incomes sufficiently. The self-employed, casually employed, and unemployed may be among the worst affected. For example, food inflation in February was 69.3%, while low interest rates have reduced the real value of savings in lira.
In politics, the lira slide and surge in inflation have contributed, along with other factors, to an increased possibility of an opposition victory over conservative/Islamist strongman President Recep Tayyip Erdoğan. However, voters’ tendency to switch allegiance on account of economic conditions is limited by deep ideological polarisations.
Meanwhile, on February 6, earthquakes killed more than 50,000 people and destroyed some 800,000 homes. The costs are officially estimated at USD104 billion (equivalent to 11% of Turkey’s 2022 GDP). Public spending will increase as large-scale reconstruction work follows immediate relief and social assistance, partly or wholly at public expense. Some taxes may be increased, but the government will also borrow more.
For its part, the main opposition bloc has promised a return to orthodox monetary policies of positive real interest rates to combat inflation. Erdoğan might also reverse his policies if re-elected. Nevertheless, history suggests full-blown austerity policies will remain a last resort, even once earthquake rebuilding, and the March 2024 local government elections, are over. Austerity may be required in future if inflation and the current account deficit persist, and/or public finances, which have been relatively strong, deteriorate.
Food riots or purely economic unrest have not occurred, perhaps because per capita GDP has regularly increased in real terms, and due to strong vertical ties of patronage, and ideological divisions preventing common action Elections also provide an outlet for discontent and reinforce ties with politicians via campaign
pledges; voter turnout in the 2018 parliamentary elections at 86.2%. The spontaneous anti-government street protests in 2013 were not primarily economic. Today, similar protests are possible if the election result is disputed, with the Erdoğan administration clinging to power.
Expropriation Risk 57 (Significant) TREND ▲
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 favour pro-government businesses.
State enterprises have privileged positions in some sectors. The current regulatory environment is unfavourable to banks – for example the government has increased banks’ corporation tax and they have been obliged to purchase low-yielding government bonds. Energy, telecoms, and pharmaceutical prices are controlled. The government has also put pressure on supermarkets over prices.
The main opposition bloc has promised fairer regulation and measures against corruption. At the same time, it will conduct a review of existing public-private-partnership projects and tighten power sector supervision.
Political Violence Risk 57 (Significant) TREND ►
Kurdistan Workers’ Party (PKK) fighters now pose little threat in the mainly Kurdish-populated south-east of Turkey. There are no signs of renewed large-scale civilian Kurdish insurgency. Military operations continue against the PKK in northern Iraq.
Erdoğan has threatened further military intervention to expand Turkey’s enclaves in northern Syria and weaken Syria’s U.S.-allied YPG (People’s Protection Units), seen as an arm of the PKK. International opposition will likely continue to deter him. While Russian-sponsored talks between Ankara and Damascus are stalled, it remains unlikely Turkey would combat an eventual assault by Damascus on the last Syrian opposition stronghold in Idlib.
Political and military tensions between Greece and Turkey have eased; Greece’s foreign minister, Nikos Dendias, visited Turkey after the recent devastating earthquakes. Under a new administration, Ankara might be less adventurous and independent, without altering its positions on the Aegean, Cyprus, and perceived terrorist threats.
Terrorism Risk 40 (Medium-Low) TREND ▼
Turkey has experienced far fewer terrorist incidents in recent years. However, a bomb explosion blamed on the PKK killed six civilians in Istanbul in November 2022. This prompted fears of further violence before the 2023 elections, as occurred in 2015. Arrests of alleged Islamic State activists continue.
Exchange Transfer and Trade Sanctions Risk 54 (Medium) TREND ►
The authorities have taken extraordinary measures to limit lira depreciation in the face of high inflation, their own low interest-rate policy, the large current account deficit and foreign debt servicing bill, limited foreign exchange reserves and global monetary tightening.
Some measures (high commissions for transfers abroad, deterrents to foreign currency lending and deposit accounts, obligations on exporters to sell foreign exchange) border on capital controls. The state is also providing guarantees against exchange rate losses to holders of USD85 billion worth of lira-denominated “exchange-rate protected” bank accounts (KKMs).
The lira traded at just over TL19 to the U.S. dollar in March 2023 from just under TL18 at end-July 2022 and remains under pressure. Outright currency controls are possible, but the administration will probably let the lira depreciate more rapidly instead, even assuming it maintains its low-interest policy.
The opposition bloc would reverse both the low interest-rate policy and the constraints on banks and exporters would be reversed. The phasing out of KKMs, which could create extra demand for foreign exchange, may be more rapid under a new administration.
In any case, the lira is likely to be volatile.
Turkish banks and companies dealing with Russia have avoided U.S. sanctions, but these could yet be applied more stringently.
Sovereign Default Risk 65 (Medium-High) TREND ▲
There is a modest risk of an eventual sovereign default. The government debt was only 35% of GDP in September 2022 but persistent fiscal deficits and/or lower economic growth would increase this figure.
Aided by strong tax revenues, the central government budget deficit for 2022 was only 0.9% of GDP despite the expansionary policies, subsidies, and guarantees. However, public finances are not fully transparent. Earthquake spending, election-related generosity, and a rising pensions bill will kick in from 2023 onwards.
The costs of foreign-currency debt servicing and guarantees to public-private-partnership projects may rise. Banks and companies may need support.
