Previous Quarterly Editions
Expropriation Risk: 59 59 61 59 Political Violence Risk: 56 59 60 58 Terrorism Risk: 56 55 55 56 Exchange Transfer and Trade Sanction Risk: 63 65 67 68 Sovereign Default Risk: 50 52 53 54
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Turkey took a decisive step in October when its forces crossed into areas of northern Syria held by the Syrian Kurdish PYD/YPG. The YPG is regarded by the US as a welcome ally in the region against Islamic State but is seen by Ankara as a terrorist organisation linked to armed Kurdish nationalist PKK insurgents within Turkey. President Trump had suddenly withdrawn US forces from YPG-controlled areas, although a subsequent US-brokered ceasefire permitted an orderly YPG retreat. Shocked by Washington’s acquiescence, the YPG reached an accommodation with Syrian and Russian forces advancing from the south. The result was a new Turkish-controlled strip that pushed the YPG some twenty miles south of the border. President Recep Tayyip Erdoğan subsequently met President Trump in Washington in November to thank him for American support for his position, but bilateral ties remain strained over several issues. In October, US prosecutors opened a case against Turkish state bank Halkbank for breaking sanctions on Iran, while the US may still sanction Turkey for its purchase of a Russian air defence system despite being a member of NATO. At home, the operation into northern Syria appears to have succeeded in shoring up President Erdoğan’s personal popularity after the extraordinary defeat of the ruling Justice and Development Party (AKP) candidate in the re-run Istanbul mayoral election in June. The fallout from that election continues, however, with authorities in Ankara attempting to limit the funding available to the new mayor, Ekrem İmamoğluof the Republican People’s Party (CHP). He in turn levels allegations of waste and corruption against his AKP predecessors. In the mainly Kurdish-populated southeast, the government has removed 25 of the 65 Peoples’ Democracy Party (HDP) mayors from office, and many have been detained on grounds of supporting the PKK. The fall of the lira in December in response to the central bank’s precipitous cut in interest rates underlined its vulnerability, while the latest official projections showing growth of 5% in each of 2020, 2021 and 2022 appear optimistic, with the figure for 2019 barely above zero and no more than 3.5% likely in 2020. Unemployment is still at a seasonally adjusted level of around 14% and investor concerns about corporate debt levels, bank credit quality, and policy stability persist. In December, parliament voted to give the government wide powers to send troops to Libya, where Erdoğan is keen to support the Tripoli-based Government of National Accord (GNA) headed by Fayez Serraj. An intervention in Libya’s civil war looks increasingly likely, especially as Erdoğan appears to have secured tactic Russian support, although it would put Ankara at odds with both the UAE and Egypt, which support the Benghazi-based Khalifa Haftar. However, Erdoğan appears to be less interested in Libya itself than in the support of a GNA government for Turkish offshore energy claims in the eastern Mediterranean, an area where aggressive Turkish prospecting has already led to clashes with the EU over infringement of Cypriot waters.
The AKP broadly favours private enterprise, including foreign investment, but maintains closer ties with some business groups and sectors than others. Public tenders, industrial policies, tax investigations and regulatory decisions may all be influenced by politics. Expropriations affecting companies accused of having links to Gulen supporters occurred after the 2016 coup attempt, but such outright moves are now much less common.
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Turkey could resume its latest incursion in Syria if the YPG does not withdraw fully, but the deal with Russia is likely to stay its hand. Coordination with Russia also makes inadvertent conflict unlikely in the Idlib area, where Turkey continues to help enforce a ‘de-escalation zone’ with the aim of preventing a further mass influx of refugees. The struggle against the PKK in southeast Turkey continues, including raids against its bases in Iraq. However, Interior Minister Süleyman Soylu has said that there are only about 500 PKK fighters left in the mountains inside Turkey.
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Despite fewer incidents in the past two years, extreme Kurdish nationalists could resume strikes on security forces or civilians in urban areas across the country, particularly after Turkey’s latest operation in Syria. Islamist extremists could again target western interests, companies or tourists. Another 32 Islamic State suspects were reportedly detained in Ankara and Samsun in October, and government statements suggest that there were about 1,500 Islamic State and Al-Qaeda members in custody at the end of 2019.
The lira had appeared relatively steady for most of the second half of 2019 until an 11% fall against the dollar over one week in December underlined once again how fragile it is. The immediate trigger was the speed with which the central bank has been cutting interest rates, with the December cut of 200 basis points meaning that it fell from 24% to 12% in less than six months. The latest cut was particularly troubling as it coincided with the return of inflation to double figures. Despite some suggestions that the authorities were attempting to weaken the currency in order to boost a recent recovery in growth, the underlying trend behind the latest fall in the lira’s value appears to be concern that Ankara's foreign policy positions are putting it on a collision course with Washington. This is what caused the lira to fall steeply in August 2018. However, as President Erdoğan is a strong proponent of low interest rates, he may well continue to push for further rate reductions during 2020.
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The budget deficit rose from 2% to 3% during 2019 despite the use of central bank reserve funds to make up for sagging revenues. A new tax bill is still before parliament but, even if passed and fully implemented, it will offer only a marginal increase in revenues. Meanwhile, concerns about fiscal transparency and government liabilities under public-private partnership schemes persist. The government has pressured state banks to lower interest rates, which may affect their profits. As the debt-to-GDP ratio is still only around 33%, the risk of default is manageable in the short term, but persistent economic mismanagement or the need for major bank or corporate bailouts could increase it considerably.
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