Without structural reforms to raise savings, reduce dependency on energy imports and improve the investment climate, Turkey ́s potential growth rate will likely decrease to 3% - 3.5% per annum.
Turkey: Atradius STAR Political Risk Rating*:
5 (Moderate Risk) - Stable
* The STAR rating runs on a scale from 1 to 10, where 1 represents the lowest risk and 10 the highest risk
The 10 rating steps are aggregated into five broad categories to facilitate their interpretation in terms of credit quality. Starting from the most benign part of the quality spectrum, these categories range from ‘Low Risk’, ‘Moderate-Low Risk’, ‘Moderate Risk’, ‘Moderate-High Risk’ to ‘High Risk’, with a separate grade reserved for ‘Very High Risk.’
In addition to the 10-point scale, rating modifiers are associated with each scale step: ‘Positive’, ‘Stable’, and ‘Negative’. These rating modifiers allow further granularity and differentiate more finely between countries in terms of risk.
Political Situation: External security issues
Head of state: President Recep Tayyip Erdogan (since August 2014)
Head of government: Prime Minister Ahmet Davutoğlu (since August 2014)
Nature of regime: Republican parliamentary democracy and secular state. The armed forces still have some political influence.
Rising political division within the country
The general elections in June 2011 delivered a clear victory for the religiously conservative Justice and Development Party (AKP), although with a reduced parliamentary majority: 327 of the 550 seats. As a result, the AKP rules with an absolute majority for the third consecutive term. However, it failed to reach a two thirds majority in parliament: the threshold for constitutional amendments. The nationalist Republican People’s Party CHP and the pro-Kurdish Peace and Democracy Party gained additional seats but remain in opposition, as does the far-right National Movement party MHP.
In recent years, the AKP government has been successful in gradually curbing the army’s political powers and increasing control over the courts. A comprehensive reshuffle of the top military leadership has further strengthened the position of civilian rule and especially that of former prime minister and now president Erdogan.
However, what some see as Erdogan pressing his own pro-Islamic ideology has annoyed a growing section of the population, especially in the cities. The protests sparked in Istanbul in the summer of 2013 were a reflection of this growing discontent and, while Erdogan prevailed in the first direct presidential elections held in August this year, he gained just 52% of the votes.
Heightened conflict in the region affects Turkish security
Because of very slow progress of the accession talks between Turkey and the EU, earlier widespread popular support within Turkey for EU accession has faded. While the AKP under Erdogan at first pressed hard for negotiations, it has now partially shifted its foreign policy and is focused on relationships with the Middle East and Central Asia: aiming to strengthen political and economic ties and grow its influence in those regions.
However, the formerly good relations with Israel have deteriorated because of differences over the Palestinian conflict and the regime change in Egypt. Turkey has taken a clear anti-Assad stance in the Syrian civil war and firmly supports the opposition forces. This is no doubt why the Syrian government has resumed its tacit support of the Kurdistan Workers´ Party (PKK). Compounded by Ankara’s tougher stance on the Kurdish question, this has led to renewed violent clashes between the PKK and Turkish forces since July 2012. Turkey’s anti-Assad stance has also damaged its relations with neighbouring Iran.
Meanwhile, geopolitical risks have increased significantly in 2014 due to the rapid gains of the jihadi group Islamic State (IS) in neighbouring Iraq (Turkey´s second largest export market) and Syria. Consequently, the security situation has deteriorated in the south eastern part of the country due to a massive inflow of refugees from Syria and fighting close to the border. The ambivalence of Turkey to the US-led coalition against IS has raised tensions with the US and the EU. This has much to do with Turkey’s internal politics: mainly the fear that the PKK´s political and military clout will increase as a consequence of the ongoing conflict in Syria.
Internal economic situation: Lower and more balanced growth
Structural weaknesses have re-emerged
In the last decade, Turkey has made impressive economic progress. With political stability since 2002, when the AKP came to power, the country has experienced GDP growth exceeding the European average, while real per capita income has increased markedly.
A fast growing population of more than 75 million and rising prosperity have turned Turkey into one of the most prominent of emerging markets.
However, since 2013 Turkey’s structural economic weaknesses have resurfaced: among them its stubbornly high inflation, large gross external financing needs, heavy reliance on volatile portfolio capital inflows and relatively weak international liquidity – coupled with increased political risks. The Turkish currency depreciated sharply in 2013 when investors withdrew money from those emerging markets deemed most vulnerable to the eventual withdrawal of US monetary stimulus. As a result, Turkey faced widening current account deficits and a plunging currency that put them in the so –called “Fragile Five” alongside India, Indonesia South Africa and Brazil.
Slowdown of growth in 2014
Following a pronounced economic slowdown in 2012, Turkey’s GDP rebounded in 2013, by 4.0%. However, the economy has lost steam again this year due to lower export growth and decreasing private consumption and investment, both constrained by higher lending rates and a depreciated currency that made imports more expensive. In Q2 economic growth slowed to 2.1% year-on-year and even contracted 0.5% compared to the previous quarter. Overall this year, economic growth of just 2.9% is expected.
High inflation remains an issue
Turkey suffers from structural economic bottlenecks. It is a net energy/commodity importer and is therefore very vulnerable to the development of world market prices: a situation exacerbated by the volatility of the Turkish lira. This is contributing to structurally high inflation, which is expected to reach almost 9% in 2014, way above the central bank´s target rate of 5%.
Economic policy: increasing concerns due to political pressure on the central bank
Public finances are sound, with small deficits of around 2% of GDP in 2014 and 2015. Public sector debt remains moderate at 40% of GDP.
However, there is growing concern over the direction of economic policy. In January 2014, with the lira plunging, the central bank raised the benchmark interest rate to 10% (from 4.5%). Uncertainty about Turkish economic policy grew as the central bank cut interest rates – to 8.25% - in the run up to the August 2014 presidential elections, despite above-target inflation (over 9% against a target of 5%) and ongoing currency depreciation. This has raised doubts about the independence of the central bank, as the Turkish government had repeatedly voiced its desire for low borrowing costs to spur growth. It seems that the central bank has bowed to political pressure and this will probably not dissipate before the general elections due in June 2015.
In general, the pace of reform of the labour market, social security and tax administration is still too slow to tackle structural unemployment and widespread ‘informal’ economic activities. Moves to privatise state banks and the power sector are also proceeding too slowly.
95% of oil has to be imported. Turkey has large lignite reserves. Hydro-electricity has a 28% share of electricity production.
External economic situation: high external financing needs