Previous Quarterly Editions
Expropriation Risk: 43 43 42 52 Political Violence Risk: 50 50 51 51 Terrorism Risk: 56 56 54 45 Exchange Transfer and Trade Sanction Risk: 55 55 55 55 Sovereign Default Risk: 47 47 47 47
TREND ►
Turkey has been experiencing a third wave of COVID-19, following earlier peaks in April 2020 and November/December 2020. In all, five million cases had been reported by early May 2021. The death rate (496 per million people) was notably lower than major European countries, perhaps partly due to under-reporting. Significant social distancing measures (including nocturnal and weekend curfews, the complete or partial closure of schools, restaurants and cafes, and restrictions on social and cultural activities) have been implemented continuously or intermittently and enforced to various degrees. Restrictions on business, work and internal travel have been lighter. Measures were eased in March 2021 but tightened again in April the same year.
Vaccinations, mostly using the Chinese Sinovac vaccine (requiring two doses), began in January 2021 and over 25 million doses have been administered. Following the initial disruption, COVID-19’s economic impact on Turkey was cushioned in 2020 by tax and social security premium deferrals, interest rate cuts, rapid credit growth and extra social spending. Turkey therefore managed to record 1.8% GDP growth in 2020, despite falling employment, not least among the large Syrian refugee community.
However, the lira weakened, precipitously, and inflation rose, reaching 17.1% by April 2021. The expansionary policies have been phased out and monetary policy tightened since late 2020. Even so, economic policy remains unpredictable, as shown by the resignation of Treasury and Finance Minister Berat Albayrak, the son-in-law of President Recep Tayyip Erdogan, in November 2020, after Erdogan had replaced the central bank governor and Erdogan’s replacement of the new governor in March 2021.
The authoritarian trend has continued, including the opening of a court case for the closure of the mainly Kurdish Peoples’ Democracy Party (HDP), the unseating and detention of another opposition parliamentarian and crackdowns on all kinds of protests. Arrests and trials of military personnel and other alleged members of the Fethullah Gulen movement, which the ruling Justice and Development Party (AKP) holds responsible for the 2016 coup attempt, have continued.
Political opinion remains highly polarised and fairly evenly balanced between Erdogan and his semi-Islamist AKP, backed by the smaller far-right Nationalist Movement Party (MHP), on the one hand and the various opposition parties headed by the left-of-centre Republican People’s Party (CHP) and right-of-centre Good Party (IYIP), on the other. Presidential and parliamentary elections are due in 2023.
In foreign policy, Turkey remains embroiled in Syria and locked into a series of disputes. Among other things, the US Biden administration continues to put pressure on Turkey, a fellow NATO member, not to deploy the S-400 air defence system which Ankara purchased from Russia. Meanwhile, the European Union, including Greece and other neighbouring countries, remains united against Turkey’s position on hydrocarbon rights in the East Mediterranean.
However, Ankara has recently sent out positive signals to both the United States and European Union, the latter of which Turkey nominally remains a candidate for membership. Ankara has withdrawn its prospecting vessels from disputed sea areas, entered exploratory talks with Greece and sent signals of rapprochement to Egypt and reportedly Israel.
Ankara has also toned down its profile in Libya, which had contributed to tensions with both the European Union and with several Middle Eastern countries. In November 2020, Turkey’s support for Azerbaijan helped the latter win a brief war with Armenia, and Turkey’s uneasy but continuous dialogue with Russia was instrumental in ending the conflict.
TREND ▲
The AKP favours private enterprise, including foreign investment, which makes outright expropriation unlikely. The seizure of some companies linked to Fetullah Gulen after the 2016 coup attempt was exceptional. However, the party maintains closer ties with some business groups and sectors more than others.
Public tenders, industrial policies, tax and anti-trust investigations and regulatory decisions could all be influenced by political preferences or lobbying by state enterprises or by private groups close to the government, to the detriment of competitors. The trend towards more hands-on industrial policies increases such risks. The judiciary is not independent.
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 sporadic attacks on military and related civilian targets are likely to recur. Turkey is also making progress, through military operations and diplomacy, towards eliminating the PKK strongholds across the border in northern Iraq, notwithstanding a failed operation to rescue PKK-held hostages in the Gara area in mid-February 2021.
In Syria, fatal bomb 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. US support for the YPG and Russian influence are likely to prevent an escalated conflict. Meanwhile, despite withdrawing forces from some exposed occupation posts, Turkey continues to help monitor the ‘de-escalation zone’ in Idlib, Syria’s last radical opposition enclave, where an eventual military push by Damascus and its allies could cause an escalated humanitarian and refugee crisis.
Within Turkey, there has been no sign of a return to large-scale civilian Kurdish insurgency. A repeat of the nationwide civil unrest witnessed in 2013 is possible in the medium term, if government actions provoke wider dissent.
TREND ▼
Turkey has experienced fewer incidents of terrorism in recent years. Despite its involvement in various conflicts, fears that Kurdish nationalists could resume strikes on security forces or civilians in urban areas across the country, and fears that Islamist extremists could again target Western interests, companies, or tourists, or fears that Syrian opposition groups could turn against Turkey with terrorist attacks, are fears that have not materialised. Arrests of alleged members of al-Qaida and Islamic State continue to be reported frequently.
Turkey’s perennial current account deficits, the large public and private sector foreign debt (USD450bn, or 63% of GDP, at year end-2020) and low foreign exchange reserves (USD46.9bn gross, excluding gold, at the end of April 2021) imply a continued risk of sharp currency depreciations.
In 2020, the current account deficit was USD36.8bn, or about 5% of GDP. Travel earnings declined by 66% due to COVID-19’s impact on the large tourism sector. Exports faced low demand whereas policies to boost the domestic economy stimulated imports.
It was also a year of financial turmoil and low net capital inflows. Coupled with untransparent central bank efforts to support the lira, the result was a sharp decline in foreign exchange reserves. However, substantial exchange controls were not imposed, the lira, which has been convertible for over three decades, was ultimately allowed to weaken- and there was no payments crisis.
In 2021, export markets are stronger while tight monetary policy and weak credit growth may curb imports, notwithstanding higher commodity prices. However, tourism revenues are likely to recover only very partially, and the prospect of tighter US monetary policy, as well as continued lack of investor and lender confidence in Turkey’s political and economic management, could continue to limit capital flows.
The budget deficit in 2020 was lower than expected at about 3.5% of GDP, although some COVID-19-related stimulus measures were financed via state banks and the off-budget Unemployment Fund. The public debt-to-GDP ratio rose to 39.5% of GDP. Even assuming a further increase in 2021, the level of debt is manageable, but persistent economic mismanagement or the need for major bank or corporate bailouts could worsen the debt situation considerably. There are some concerns about fiscal transparency including public-private partnership infrastructure projects and the Turkish Asset Fund- the sovereign wealth fund that owns most state enterprises.
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