Previous Quarterly Editions
Expropriation Risk: 56 59 59 60 Political Violence Risk: 56 56 56 59 Terrorism Risk: 60 58 56 55 Exchange Transfer and Trade Sanction Risk: 56 65 63 65 Sovereign Default Risk: 42 50 50 52
TREND ▲ OUTLOOK ▲
Having contracted by 3.0% year-on-year in the fourth quarter of 2018, and with the annual figure falling to 2.6% from 7.4% in 2017, growth remained sluggish during the first quarter of 2019. Seasonally adjusted unemployment remains around 13%, and concerns about corporate debt levels and bank credit quality persist. Annual consumer price inflation was 20% in March, with food price inflation at 30%, and the central bank is maintaining its interest rates at the emergency level of 24% set following the currency collapse in mid-2018. It was against this background that voters went to the polls for nationwide local government elections on March 31. President Recep Tayyip Erdogan’s Justice and Development Party (AKP) and its right-wing ally, the Nationalist Action Party (MHP), won more than half of the votes, aided by the AKP’s domination of public administration and the media and its campaign platform that tied their opponents to the armed Kurdish nationalist PKK and the group behind the 2016 coup attempt. Nevertheless, the main opposition Republican People’s Party (CHP) managed to end the AKP’s control of Istanbul, Ankara, and several other cities. After the elections, political tensions rose. CHP leader Kemal Kilicdaroglu was assaulted and almost killed, allegedly with the connivance of the authorities, while attending a funeral in April. President Erdogan prolonged the tension by insisting that elections in Istanbul be rerun in a blatant attempt to reverse the March result and restore AKP control. Istanbul has symbolic importance for Erdogan, who built his political career as its mayor, but more importantly the city’s municipal budget of around 5 billion dollars has become an important source of patronage for companies and social institutions with links to the AKP. By making less than credible allegations of fraud and insisting that Istanbul’s electorate of 10.5 million votes again in late June, Erdogan risks either a second defeat or must negate the evident support of the CHP, which has increased since the March election result. Meanwhile, relations with Washington remain fraught over several issues headed by the purchase by Turkey, a NATO member, of the Russian S-400 missile defence system. In Syria, Turkey continues to help enforce an increasingly tenuous, Russia-brokered truce between rebels and the Damascus government around Idlib, without which Turkey could find itself facing another huge influx of refugees. Turkish threats to take military action to expand the area of northern Syria under its own control into which it would move the large numbers of Syrian refugees currently in Turkey have not materialised. In March, the European Parliament called for the formal suspension of talks on Turkey’s accession to the EU, citing violations of human rights and the rule of law, and the results of the European parliamentary elections in May will deepen anti-Turkish sentiment.
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 be influenced by politics. A central problem for the business community with President Erdogan’s centralisation of authority has been the way in which he has wielded that power. His adamant opposition to higher interest rates because of their depressing impact on growth led the central bank to delay rate rises and helped precipitate last year’s currency crisis. In recent months, the president has criticised banks for high interest rates and supermarkets for high food prices, apparently obliging them to plan.
TREND ► OUTLOOK ▲
Turkey’s military engagement in northern Syria is creating rifts with several key actors but ongoing diplomacy, including coordination with Russia, makes inadvertent conflict very unlikely. Fighting with the PKK continues in the mainly Kurdish-populated southeast Turkey and across the border in Iraq, and casualties are likely to increase over the summer. Elsewhere, renewed protests against the government are possible, given Turkey’s highly polarised politics, the government’s record on human and civil rights, and rising confidence among government opponents following the local elections and widespread concerns about rising unemployment. The outcome of the rerun Istanbul elections has the potential to be a turning point, either by reaffirming the CHP’s ability to defeat the AKP or forcing the AKP to take unpopular measures.
TREND ▼ OUTLOOK ▲
Although Turkey has witnessed many kinds of terrorism, there have been few incidents in the past two years. However, Islamist extremists could again target western interests, companies or tourists, while 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 provoke a terrorist response within Turkey itself. Arrests of individuals on suspicion of links with Islamic State continue.
The convertibility of the lira has survived repeated crises since 1989 but the currency remains volatile. Having reached almost 7 to the dollar last year, it recovered to 5.6 prior to the local elections before falling to 6.2 on the uncertainty associated with the Istanbul re-run. Meanwhile, additional trade tariffs reciprocally imposed by Turkey and the US in 2018 remain in force. The re-imposition of US sanctions on Iran has complicated business relations for Turkey and weakened Iranian demand for goods and tourism services, while the abrupt end in May to the US waiver on sanctions that prevent on oil purchases from Iran is forcing Turkey to look elsewhere for almost half its needs.
The budget deficit soared to 6.2 billion dollars in the first quarter of 2019 as the government increased spending to stimulate a weak economy. Despite cuts in investments, the deficit may well end 2019 above 3%, up from 2% in 2018. As the public debt was only 30% of GDP at the end of 2018, the risk of default is relatively contained but could rise quickly in the event of persistent economic mismanagement or the need for major bank or corporate bailouts. In April the government announced a bond issue of around 5 billion dollars that will be used to shore up capital in the banking sector.
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