Previous Quarterly Editions
Expropriation Risk: 53 54 56 59 Political Violence Risk: 60 60 56 56 Terrorism Risk: 66 64 60 58 Exchange Transfer and Trade Sanction Risk: 56 54 56 65 Sovereign Default Risk: 44 44 42 50
TREND ▲ OUTLOOK ▲
Having brought forward the presidential election to June, Recep Tayyip Erdogan won with 51.6% of the vote to strengthen his domination of the administration, judiciary, security forces and media. His Justice and Development Party (AKP) received 42.6% in the simultaneous parliamentary elections, winning 295 out of 600 seats, while its far-right ally the Nationalist Action Party (MHP) took an additional 49 seats. Erdogan is now fully implementing the authoritarian “presidential” system of government approved by the disputed referendum in 2017, abolishing the post of prime minister, centralising decision-making in the presidency, and minimising democratic checks and balances. The AKP now hopes to bring forward the local government elections due next March to November 2018. The state of emergency in force since the 2016 coup attempt was allowed to expire in July, although not before a further 18,500 public sector employees were removed from their posts for alleged terrorist links in its final days. However, as president, Erdogan can now issue decrees on many areas including detention and he has already increased the law-and-order powers available to provincial governors. A combination of international factors with Erdogan’s insistence on pro-growth policies in the face of a large current-account deficit has produced a substantial level of mainly private sector foreign debt. The lira has plummeted repeatedly, interest rates have soared, and consumer price inflation reached 15.8% in July. Combined with strong tourism revenues, a fall in imports due to the weak lira will temper the current account deficit. Nevertheless, Turkey needs to restore international financial confidence to bolster the lira. While GDP expanded by 7.4% year on year in the first quarter, a sharp slow-down was inevitable and current government expectations of 5% for the year look optimistic. The lira’s collapse was exacerbated by Erdogan’s appointment of his son-in-law Berat Albayrak as finance minister and his refusal to make an immediate clear commitment to tight fiscal and monetary policies. In addition, relations with the United States have worsened. On August 1, the White House placed sanctions on the interior and justice ministers over the treatment of an American pastor and other US citizens and consular staff on trial in Turkey. For its part, Ankara wants a former deputy head of the state bank Halkbank, who has been convicted in the US of helping Iran evade US sanctions, to be returned to Turkey, and Halkbank to be protected from further charges or excessive penalties. Separately, the US Congress has frozen delivery of F-35 fighter jets to Turkey over its decision to buy Russian S-400 missile defence systems, and US senators are seeking to restrict lending to Turkey by international financial institutions. There seems little prospect of a rapprochement with the Trump administration soon.
TREND ▲ OUTLOOK ►
Despite its current approach to civil liberties, the AKP’s economic policies are broadly liberal but it maintains closer ties with some business groups and sectors than others. Industrial policies that support strategic investments can be deployed to political effect, as was seen with the actions taken against many companies after the 2016 attempted coup. In July, seven members of the Boydak family, which owns the country’s leading furniture manufacturer, were sentenced to up to eighteen years’ imprisonment for membership of a terrorist organisation, and their shares in the company were confiscated.
TREND ► OUTLOOK ▲
In the mainly Kurdish-populated southeast of the country, clashes continue between security forces and the armed Kurdish nationalist PKK. In May and June, Turkey stepped up its attacks on the PKK bases in northern Iraq. Elsewhere, a Syrian government drive to reassert control over the so-called de-escalation zone in Idlib, in which Turkey has posted observers, could lead to a large influx of refugees into Turkey which the government worries could include Islamist militants.
TREND ▼ OUTLOOK ►
Despite several alerts and a continuing round-up of suspected Islamic State members, most recently in Istanbul in July, there have been few acts of terrorism since early 2017. 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 including major cities beyond southeast Turkey.
TREND ▲▲ OUTLOOK ►
The free-floating lira ended August at 6.75 to the dollar having been 3.8 in February. Despite President Erdogan’s opposition to high interest rates, the central bank raised its main lending rate by five percentage points each month in April, May and June to reach 17.75%. However, its failure to raise the rate further after his re-election in July, despite consumer price inflation hitting a 14-year high, accelerated the lira’s decline amid assumptions of political pressure. It finally pushed the benchmark to 24% mid-September only for the effect to be undercut by further statements from Erdogan as he fuelled local rumours that foreign currency bank accounts might be frozen or forcibly converted to lira accounts. In June, Turkey retaliated against tariffs on steel and aluminium imports imposed by the US in March by introducing extra duties of its own on imports of rice, tobacco, cosmetics, alcoholic drinks, cars and other US products. The re-imposition of US sanctions on Iran from August will hurt Turkey’s trade with a neighbour and major oil supplier, further damaging relations with Washington.
The budget deficit in the first half of 2018 was 80% higher than a year earlier, and the full-year deficit could reach 3% of GDP compared to 1.5% in 2017. In August, the government pledged to limit the deficit to 2% but windfall revenues from the restructuring of tax debts and similar schemes are unlikely to offset the costs of the extra incentives for businesses and hand-outs to pensioners announced before the elections. High borrowing costs and a weak economy will make the deficit difficult to contain in 2019 as well, while the public debt will rise above its current low level of about 30% of GDP. Turkey is due to repay around 70 billion dollars of external debt, equivalent to 8% of GDP, by May 2019. The government continues to rule out any approach to the IMF.
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