Turkey remains a conundrum


Jeremy Weltman
Published on:

Concerned by policymaking risks, analysts are lukewarm on junk-status Turkey’s prospects, despite the fact it compares favourably alongside investment grades.

Turkey’s economy has rebounded but political manoeuvrings could result in
a plunge in confidence

The Turkish lira sunk to a new low last week, a move precipitated by heightened political tensions and inflation concerns in the wake of political resistance to raising interest rates.

The central bank responded by lowering commercial banks’ borrowing limits ahead of a monetary policy meeting on December 14 analysts are eagerly anticipating.

Economists continue to treat Turkey with considerable caution, resulting in the sovereign borrower plummeting in Euromoney’s country risk survey on a five-year historical horizon – a period in which government has failed to get to grips with the deficit, inflation or external risks, and the country has been rocked by political and social upheaval:


In March, analysts were downgrading, concerned the economy would be weaker, but also citing the acute political risks and growing external debt burden.

The economy has since rebounded, with the global recovery and domestic credit policies bolstering some of Euromoney’s economic indicators, notably for GDP growth. The security situation has improved, too, and the exchange rate will lift if the restoration of investor confidence entices capital inflows.

ECR contributor Sevcan Güneş, an associate professor at Pamukkale University, says: “Turkey is highly dependent on capital inflows due to the low level of saving and persistent current-account deficit problem.”

The Turkish private sector is carrying a short-position where FX liabilities are higher than assets, which is a problem if capital inflows suddenly stop. Plus, Turkey is not very successful at attracting foreign direct investment (FDI) inflows into the sectors that need it.

It is the structure of FDI investment and short-term portfolio investment that helps to explain volatility of the lira, Güneş believes.

“Whether in the near-future the Turkish lira will appreciate or further depreciate depends on the decisions of international investors,” she says.

In the meantime, Turkey’s country risk score has pushed the country slightly higher to 59th from 186 countries in the global risk rankings alongside Romania and Hungary, both investment grades.

Yet Turkey is still 10 places below its ranking in 2007, and remains sub-investment grade, with concern for the political and policymaking situation given the autocratic and pugnacious president Recep Tayyip Erdogan is in control.

His government has tried to engineer higher economic growth through bank lending.

Temporary effect

The credit guarantee fund providing liquidity to the corporate sector has proved to be an efficient counter-cyclical tool, say BBVA economists, but it cannot last.

“It has had a positive, but temporary effect on growth, with a somewhat delayed effect on inflation,” they state. “Once the positive impact on growth fades, the challenge for the government is how to maintain the impulse.”

Forecasters, indeed, see economic prospects fading.

In its latest semi-annual economic outlook, the OECD foresees GDP growth moderating from 6.1% this year to 4.9% in 2018, and a persistently high unemployment rate of 11%, with the current-account deficit widening from 4% of GDP to 4.9%. Inflation will ease from this year’s double-digit pace, but remain elevated at 9.9%.

Forecasts from the European Commission paint a broadly similar picture, but partly because the government is also addressing a fiscal deficit predicted to narrow from 2.4% of GDP this year to 1.8% in 2018.

Economic prospects could remain strong for longer than expected, given recent high industrial-production figures into the fourth quarter and favourable external growth trends continuing.

However, business and consumer confidence are waning, and analysts are still concerned by the strong rise in external debt compensating for the dearth of domestic deposits, and highlighting the low level of saving – several have stated their opinions in confidence.

In that respect, Turkey’s longer-term risks are concerning.

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