Turkey: Constitutional referendum elevates political & economic risks

30 March 2017

A ‘yes’ vote in Turkey’s upcoming constitutional referendum would concentrate executive authority around President Recep Tayyip Erdoğan, leading to more interventionist economic policies. Whilst the business environment would also be weakened, Turkey’s renewable energy sector will perform well, benefitting from government support.

Security Environment

Turkey will hold a constitutional referendum on 16 April 2017 on proposals to abolish the position of prime minister, transferring executive power to the president. If successful, the constitutional changes would further consolidate power around Erdoğan. Polling in March 2017 suggested that the result would be close, with an average of poll results suggesting that 46% would vote for the proposals.

A victory for the ‘yes’ campaign would make a ceasefire with the Kurdistan Workers’ Party (PKK) unlikely in the medium-term outlook. The Nationalist Movement Party (MHP) agreed to support President Erdoğan’s referendum proposals, likely in exchange for its integration into the government. MHP’s policy stance centres on a commitment to Turkish nationalism and Sunni Muslim values, making it unlikely that it would support talks with the PKK.

As a result, the security environment will remain weak in 2017. Turkey faces a dual terrorism threat from both the PKK and Islamic State. The PKK has historically targeted energy infrastructure assets. In February 2016, Statkraft suspended construction on the 517MW Cetin hydropower plant due to security concerns. Renewable energy assets will be at lower risk of attack, as they are of less strategic importance to the Turkish economy than gas pipelines. However, the risk may rise as the government reconfigures the power mix in favour of renewables.

Trading Environment

Approval of the constitutional amendments would weigh on Turkey’s already challenging economic outlook. With a strengthened residency Erdoğan would be free to pursue greater government intervention in the economy, which is his preferred policy to stimulate economic growth. However, populist policies will expand the fiscal deficit and erode sovereign creditworthiness. The fiscal deficit is forecasted to reach 2.8% in 2017, the highest level for seven years.

Lira volatility will elevate currency inconvertibility and transfer risks for foreign investors. Sustained depreciatory pressure saw the lira fall by more than 17% over 2016. In a risk positive development for investors in the power sector, the lira has appreciated since January 2017, as the Central Bank of Turkey (CBRT) gradually raised the average cost of funding. However, renewed depreciation is possible in 2017, particularly as the CBRT will remain under pressure from Erdoğan to keep interest rates low. If US dollar reserves are strained significantly, there is a risk that the government will abandon its contractual obligations to maintain US dollar-denominated feed-in tariffs for wind energy project developers, which have so far protected investors from lira volatility.

Investment Environment

Despite downside political and economic risks, Turkey’s renewable energy sector will be an outperformer in Europe in the next decade. In 2017, growth in non-hydropower renewables generation is forecasted at 12.9% y-o-y. The government is pursuing a ‘30-30-30’ plan which aims to reconfigure the power mix, to ensure that Turkey relies equally on renewable energy, nuclear and coal, attributing a 30% share of generation to each by 2023.

However, consolidation of power around the presidency will undermine the wider business environment in 2017. Since the July 2016 coup attempt, the government has shown willingness to target private sector business interests that it deems to be affiliated with its political enemies with expropriation or contract alterations. However, if a project is wholly foreign owned and in a small and not strategic sector, such as renewables, the risk is significantly lessened.

The independence of the courts has also been undermined, as the government has purged close to 4,000 members of the judiciary since July 2016. Foreign companies will have to be increasingly careful of maintaining good relations with the government or risk adverse judicial decision making in commercial disputes.

cps risk outlook april 2017

In this month's Risk Outlook, we also provide a detailed forward looking assessment of developments within the security, trading and investment environments for Peru, Somalia, Argentina and Jordan, all of which have been the subject of recent enquiries from JLT's client base.

CPS Risk Outlook April 2017

The monthly Risk Outlook is supported by JLT’s proprietary country risk rating tool, World Risk Review (WRR) which provides risk ratings across nine insurable perils for 197 countries. The country risk ratings are generated by a proprietary, algorithm-based modelling system incorporating over 200 international sources of data.

Download April Risk Outlook

For further information, please contact Eleanor Smith, Political Risk Analyst on +44 (0)121 626 7837 or email eleanor_smith@jltgroup.com

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