Index Trend Previous Quarterly Editions
Expropriation Risk: 52 ► Political Violence Risk: 51 ► Terrorism Risk: 44 ▼ Exchange Transfer and Trade Sanction Risk: 45 ▼ Sovereign Default Risk: 47 ►
Risk Temperature 49 (Medium -2)
TREND ►
Turkish politics are highly polarised. President Recep Tayyip Erdoğan and his semi-Islamist Justice and Development Party (AKP), backed by the Nationalist Movement Party (MHP), confront an alliance of the secularist/social democratic Republican People’s Party (CHP) and the right-of-centre Good Party (IYIP), as well as the mainly Kurdish -- and heavily persecuted -- Peoples’ Democracy Party (HDP), which could be closed by the Constitutional Court.
Despite its authoritarian rule and control of the media, internal rivalries and perceptions of favouritism and corruption could weaken the AKP ahead of the presidential and parliamentary elections due in 2023. Allegations made by fugitive gang leader Sedat Peker have damaged Interior Minister Süleyman Soylu. In July, parliament approved a bill extending for a further one to three years some of the emergency powers which the government imposed after the 2016 coup attempt, including extended detention periods and powers to dismiss public officials and ban demonstrations. Minister of Education Ziya Selçuk resigned in August, apparently over interference by presidential aides.
Meanwhile, Turkey has been experiencing a drought, extensive forest fires, fatal floods and a fourth wave of COVID-19. The death rate from the pandemic (667 per million people) remains lower than in most European and American countries, 60% of the adult population is now fully vaccinated, and restrictions have largely been lifted. However, vaccination hesitancy and the Delta variant have emerged as challenges.
Turkey overcame the initial slump in economic activity brought about by COVID-19 at the cost of a wider public deficit, lower state and private bank profits, a decline in foreign exchange reserves, a very weak lira and high inflation. Gross Domestic Product (GDP) grew by 7.2% and 21.7% respectively, year-on-year, in the first and second quarters of 2021. Subsequent growth rates will be much lower. Tourism has recovered only partially. Unemployment (seasonally adjusted) came down to 10.6% in June, but the labour under-utilisation rate was still 22.4% and youth unemployment 22.7%. Inflation reached 19.25% in August 2021.
Ankara remains embroiled in Syria and locked in a series of disputes with the United States and the European Union. However, it has sought to mend fences with Washington by siding with Ukraine against Russia, not deploying the S-400 air defence system purchased from Moscow and briefly offering to guard Kabul airport -- Afghanistan is now in Taliban hands once again.
Disputes over hydrocarbon rights in the East Mediterranean and roles in Libya have cooled off, paving the way for dialogue with Greece, Egypt and most recently the United Arab Emirates.
Expropriation Risk 52 (Medium ) TREND ►
The AKP favours private enterprise, including foreign investment, making outright expropriation unlikely. The seizure of some companies linked to Fetullah Gulen after the 2016 coup attempt was exceptional. Free market conditions broadly prevail and are accepted by all significant political parties. Nevertheless, public tenders, industrial policies, tax or anti-trust investigations and regulatory decisions may all be used to favour private groups close to the government or hamper other groups.
State enterprises play an important role in some sectors. The judiciary is not independent. The CHP has threatened to nationalise public-private-partnership projects, which it considers corrupt and damaging to public finances.
Political Violence Risk 51 (Medium ) TREND ►
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 conduct military operations against the PKK in northern Iraq, suffering some casualties. There has been no sign of a return to large-scale civilian Kurdish insurgency in Turkey.
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.
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.
Developments in Afghanistan have re-focussed attention on Turkey’s huge, mainly Syrian refugee population, whom many consider a burden, and who face sporadic acts of violence.
Opponents of the government could turn to civil unrest -- for example, if the 2023 elections are perceived as rigged.
Terrorism Risk 44 (Medium) TREND ▼
Turkey has experienced fewer incidents of terrorism in recent years. Fears that 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.
Exchange Transfer and Trade Sanctions Risk 45 (Medium) TREND ▼
The perennial current account deficit and large public and private sector foreign debt (USD448.4bn, or 61.5% of GDP, as of the end of March 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.
External balances have improved this year. The current account deficit was only USD13.6bn in the first half of 2021 compared to USD21.2bn in January-June 2020, partly due to a strong export market. Net capital inflows broadly covered the reduced deficit, notwithstanding low investor and lender confidence. Gross central bank foreign exchange reserves recovered from just USD40.4bn in November 2020 to USD78bn in August 2021. The lira traded at about 8.3 to the US dollar in early September 2021 compared to 8.7 three months earlier. Even so, lira volatility could resume at any time, particularly given the prospect of tighter US monetary policy.
Sovereign Default Risk 47 (Medium) TREND ►
The public debt-to-GDP ratio remains modest at 40.5% of GDP as of March 2021. Moreover, despite rising interest costs, the medium-term programme for 2022-2024 aims to reduce the public sector general deficit from 3.9% of GDP in 2020 and 2021 to 3.7% in 2022 and 3.4% in 2023. 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.
