Previous Quarterly Editions
Expropriation Risk: 61 59 59 61 Political Violence Risk: 60 58 60 58 Terrorism Risk: 55 56 56 54 Exchange Transfer and Trade Sanction Risk: 67 68 69 68 Sovereign Default Risk: 53 54 56 58
TREND ► OUTLOOK ▲
Most of the early measures taken to control the spread of COVID-19 had been lifted by June 2020. This included lockdowns for elderly people and children, internal travel bans, weekend curfews, extensive working from home following the closure of many workplaces, and the cancellation of public events. In mid-April 2020, official sources were reporting 4,000 new COVID-19 cases and over 100 deaths daily. As of late May and June 2020 there were about 20 deaths per day. New cases also fell but rebounded slightly in June 2020, reaching 1,500 on some days, and by mid-July 2020, official numbers showed 220,000 cases and 5,400 deaths. The economic impact has been severe. GDP grew by 4.5% year-on-year in the first quarter of 2020, but available data suggests a huge contraction in the second quarter. Industrial production in April 2020 was 31% lower than in April 2019, and a slight recovery in May 2020 still left it down 20% year-on-year. The government has responded with tax and social security premium deferrals, credit guarantees, and extra social assistance spending. Banks have been encouraged and indeed pressured to maintain and increase lending, and the central bank has loosened monetary policy even further with rate cuts and bond purchases. At the same time, increasing authoritarianism under President Recep Tayyip Erdoğan, and his ruling Justice and Development Party (AKP), has continued though polls show that support for both has fallen below 40%. In June 2020, three opposition MPs were stripped of their seats in parliament, where the AKP’s overall majority is now down to a handful of seats, while the interior minister has created a force of some 20,000 ‘night watchmen’. In June 2020, they were given powers similar to those of the police and are clearly meant to be a force that deters anti-government demonstrations. Meanwhile, arrests and purges related to the Fethullah Gulen movement, which the AKP holds responsible for the 2016 coup attempt, have continued and June 2020 saw another 400 arrests that mainly involved military personnel. In Libya, Turkish military support has enabled the Government of National Accord to repel an assault on Tripoli by eastern Libyan National Forces led by Khalifa Haftar. In İdlib, the last major rebel stronghold in Syria, Turkey and Russia continue their joint policing of the ceasefire line agreed in March 2020, tenuously preventing a resumption of war and a further mass influx of Syrian refugees into Turkey. This regional engagement has encouraged Ankara to make more effort to balance its relations with Moscow and Washington, its NATO ally. It is notable that it has not yet made operational the S-400 air defence system purchased from Russia at the cost of US sanctions that include Turkey’s removal from the F-35 fighter jet programme. However, relations with the EU, and France in particular, continue to worsen over Ankara’s role in Libya and its pursuit of gas in the eastern Mediterranean.
TREND ▲ OUTLOOK ►
The AKP favours private enterprise, including foreign investment, which makes outright expropriation unlikely, although some occurred after the 2016 coup attempt involving companies linked to Fetullah Gulen. However, the party maintains closer ties with some business groups and sectors more than others. Public tenders, industrial policies, tax investigations and regulatory decisions could all be influenced by politics. There is also a trend towards corporatist policies rather than liberal ones. Government efforts to boost the economy have led to pressures on the banking sector and an increase in the market share of the state banks. In June 2020, the resolution to a particularly complex case saw Telia of Sweden withdraw from Turkey by selling its shares in mobile phone operator Turkcell to the Turkish Asset Fund (which is the public wealth fund that owns most state enterprises), at a price well below the market valuation.
TREND ▼ OUTLOOK ►
The intervention in Libya confirms Ankara’s willingness to engage in regional conflicts that carry some risk of escalation. In Syria, Turkey is supporting an arm of the opposition while restraining- but also protecting- the radical opposition in Idlib. Simultaneously, it controls enclaves in the north, where it could also resume its incursions against the Kurdish nationalist YPG, which it regards as an arm of the armed Kurdish opposition movement, the PKK. Ankara aims to eradicate the PKK presence in the mainly Kurdish-populated southeast of Turkey, and across the border in Iraq. Within Turkey, PKK activity now appears to be limited mainly to relatively infrequent attacks on military and related civilian targets. Despite economic problems and the government’s treatment of Kurdish mayors and politicians, there has been no sign of a return to larger-scale Kurdish insurgency and conditions are not ready for a repeat of the nationwide civil unrest of 2013.
Although Turkey has experienced fewer incidents of terrorism in recent years, Kurdish nationalists could resume strikes on security forces or civilians in urban areas across the country. Islamist extremists could again target western interests, companies, or tourists; or Syrian opposition groups could turn against Turkey with terrorist attacks. Arrests of alleged members of Islamist extremist groups continue but the current economic difficulties could benefit terrorist groups if they seek to recruit.
TREND ▼ OUTLOOK ▲
Exports have been affected more than imports by the COVID-19 pandemic, pushing up the current account deficit for January-May 2020 by almost 35% compared to the same period last year in 2019. The widening deficit coincided with net capital outflows. Gross central bank foreign exchange reserves plunged to below 50 billion USD in mid-May 2020 before recovering a little with the aid of an enhanced swap deal with the Qatari central bank. In these circumstances, the ever-volatile lira weakened to over 7.20 to the dollar (USD) in May 2020 before recovering to about 6.85 in mid-July 2020, compared to just under 6.00 at the start of 2020. Further weakness is very possible. Imports are likely to fall from now on but summer tourism revenues will be decimated by the COVID-19 pandemic. Interest rates are negative in real terms and the central bank halted its long series of rate cuts in June 2020 with the official policy rate at 8.25% and consumer price inflation at 11.4%.
TREND ▲ OUTLOOK ▲
The COVID-19 pandemic, the related downturn in the economy, and the stimulus measures introduced by the government, have had a severe effect on public finances. This year’s budget deficit could reach 7% of GDP, mostly funded by domestic borrowing. Contingent liabilities and the balances of state enterprises and the Unemployment Fund will also be affected. The public debt-to-GDP ratio, which was 33% at the start of 2020 could end the year at 40%. At this level, the debt is still manageable and Turkey has not sought IMF support. But a prolonged COVID-19 crisis, persistent economic mismanagement, or the need for major bank or corporate bailouts, could worsen the debt situation considerably.
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