Previous Quarterly Editions
Expropriation Risk: 54 56 59 59 Political Violence Risk: 60 56 56 56 Terrorism Risk: 64 60 58 56 Exchange Transfer and Trade Sanction Risk: 54 56 65 63 Sovereign Default Risk: 44 42 50 50
TREND ▼ OUTLOOK ▲
The crash of the lira in August 2018 forced President Recep Tayyip Erdogan to paper over the cracks in his relations with Washington and allow the central bank to push up its benchmark rate by 625 basis points to 24% in September. This helped the currency to a partial recovery, but the economy continued to weaken amid corporate debt concerns. Year-on-year GDP growth slowed from 7.2% in the first quarter to 5.3% in the second and 1.6% in the third before possibly turning negative in the fourth. Annual consumer price inflation ended the year at 20.3%, down from a 16 year high of 25.2% in October, as the currency regained some strength. With nationwide local government elections due on March 31, Erdogan’s Justice and Development Party (AKP) government has raised the minimum wage for 2019 by 26%, cut gas and electricity prices, extended amnesties for illegal building and overdue social security premiums, maintained sales tax reductions on durable goods, increased incentives for employers, and offered new credit lines for small businesses and credit card debtors. Combined with the AKP’s domination of public administration, the security forces, the judiciary, and most of the media, these measures look set to preserve its electoral support. However, confidence in the economy remains low. Moreover, ties with the US deteriorated again after Washington announced in December that it is pulling troops out of Syria but did not support Ankara’s plans to increase its role there because of Erdogan’s planned military operations against the Kurdish YPG militia. The YPG fought alongside US forces against ISIS but Ankara sees it as a terrorist organisation and an offshoot of the Kurdish nationalist organisation, the PKK. Meanwhile, Turkey is helping to enforce a tenuous, Russia-brokered truce between Syrian rebels and the Damascus government around Idlib, without which Turkey could find itself facing another huge influx of refugees. By the end of January, Ankara was again talking of an invasion of north Syria to create an area to which the large numbers of Syrian refugees currently in Turkey could return, but any move to do this will lack international support. Relations with Washington also remain strained by the Turkish order for Russia’s S-400 missile defence system, the continuing US refusal to grant the extradition of religious leader Fethullah Gulen, who is wanted by Ankara in connection with the 2016 coup attempt, and the conviction by a US court of a former deputy head of the state bank Halkbank on charges of helping Iran to evade US sanctions. Meanwhile, Turkey’s trade with some other countries may be affected by global protectionist trends or by its own foreign policies, notwithstanding the customs union with the EU.
TREND ► OUTLOOK ▲
The AKP broadly favours private enterprise, including foreign investment. However, it maintains closer ties with some business groups and sectors than others. Public tenders, as well as industrial policies such as those supporting strategic investments, regulations, and tax investigations, may be influenced by politics. Although Toyota announced plans in November for the first hybrid vehicle to be built in Turkey, last year’s collapse of the lira and the slowdown in European car sales have hit the country’s automotive sector very hard.
Turkey’s military engagements in northern Syria create risks of conflict with several actors, but ongoing diplomacy, including coordination with Russia, makes inter-state conflict very unlikely. In the mainly Kurdish-populated southeast of the country, security forces appear to have had some success in reducing operations by the PKK, but clashes continue, together with Turkish attacks on the PKK in northern Iraq. This conflict could re-escalate in the medium term. Elsewhere, however, there are no indications of mass protests or ethnic conflict in the coming months.
TREND ▼ OUTLOOK ►
Turkey has witnessed many kinds of terrorism in the past, but there have been few incidents in the past two years. The main risks are that Islamist extremists could again target western interests, companies or tourists, and that extreme Kurdish nationalists could resume strikes on security forces or civilians in urban areas beyond the southeast of the country. An increased military role in Syria could also increase the risk of a terrorist response within Turkey itself.
Despite the 2018 crisis, the risk of currency controls has not risen. In October, following the lira crisis, it was made compulsory to conduct certain transactions in lira but the changes were limited, the financial sector and foreign interests were excepted, and the currency continued to float freely. Exchange rate risk, on the other hand, remains substantial. The lira began 2018 at 3.8 to the dollar before falling close to 7.0 in August and then finishing the year at 5.3 before continuing that recovery during January. The perennial current account deficit gave way to a surplus between August and November as the weak lira and a slump in domestic demand deterred imports. However, uncertainty about foreign policy, the state of the economy and fiscal and monetary policies, as well as global factors, continue to threaten capital inflows. Markets will also remain sensitive to any renewed attempt by the president to pressure the central bank to cut interest rates, particularly if the recent decline in inflation continues much into 2019. Additional trade tariffs reciprocally imposed by Turkey and the US in 2018 currently remain in force, and the re-imposition of US sanctions on Iran has forced Turkey to reduce oil imports from its neighbour while weakening Iranian demand for imports.
The government kept the budget deficit for 2018 down to 16.3 billion dollars, or about 2% of GDP. In 2019, lower windfall revenues, higher interest payments, pre-election stimulus measures and the weak economy will make the deficit more difficult to contain, despite some spending cuts. As the public debt is only about 30% of GDP, the risk of sovereign debt default will not be a major concern. However, it could rise in the event of persistent economic mismanagement or the need for major bank and corporate bail-outs.
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