Turkish risk experts run for cover

By:
Jeremy Weltman
Published on:

Far from stabilizing, the sovereign’s economic imbalances and political uncertainties are behind another round of downgrades.

Turkey flag-R-600


Turkey’s risk score slipped in the second quarter, anchoring the sovereign in 53rd position out of 186 countries in Euromoney’s country risk survey.

And its score has declined further in the past few weeks to 54.8 points from a maximum 100 and will be lower still when the survey contributors complete their risk evaluations for the third quarter.

Only a few years ago, the country was more than three points higher, offering investors a safer option.

 

Pessimism growing

Emre Deliveli, a freelance consultant and columnist for the Turkey-based Hürriyet Daily News, had already adopted a more pessimistic stance than the survey’s mean average.

He is now preparing to adjust his risk-indicator scores further downwards to factor in recent developments, and believes it is inevitable others are doing the same.

"Each new data release is worse," he says. "The trade and current-account deficits are not shrinking a lot, despite the lira devaluation."

Panayotis Gavras, head of policy and strategy at the Black Sea Trade and Development Bank (BSTDB), has followed suit, noting among other factors: "The economy is in a more precarious position than it was during the first half of the year, with global uncertainty rising and markets under stress."

Turkish real GDP growth has fallen from its highs of 8% to 9% per annum in 2010-11, to just 2.9% in 2014, which also highlights Turkey’s trade orientation towards weak markets in Europe, Iraq, Russia and Syria.

The lira has shed a quarter of its value against the dollar since the beginning of the year, weakening consumer confidence and keeping inflation high, highlighting the borrower’s vulnerability to capital outflows given its huge external financing needs – especially since the increased focus on China and emerging markets.

Political risks

Economic deterioration is compounded by political problems as president Recep Tayyip Erdogan’s struggle for control continues after his Justice and Development Party lost its parliamentary majority in June and has failed to form a coalition, sparking fresh elections in November.

In downgrading his own risk-factor scores, Sevcan Günes, an associate professor at Pamukkale University, cites "huge political risks", including a law system that is "no longer objective".

BSTDB’s Gavras concurs, noting also Turkey’s failure to form a coalition government and the lost opportunity this represents.

"I had been optimistic that the election result might help Turkish political society mature and institutionalize certain processes that aid mutual understanding and cooperation, as opposed to polarization," he says.

"The re-ignited conflict with PKK [Kurdish insurgency] and the low level, but growing, strife has disappointed those hopes."

The survey’s scores for the regulatory and policymaking environment, and government stability were already downgraded earlier this year, with corruption a huge problem.

Delays to policymaking and the challenges wrought by the surge in violence and terrorism threats are all among the risks that investors must contend with as Turkey becomes a more challenging prospect.

This article was originally published by ECR. To find out more, register for a free trial at  Euromoney Country Risk.