Update on political risks to monitor in Turkey

03 October 2019

Update on political risks to monitor in TurkeyTurkey will face a number of security, investment and trading challenges in the coming months. In this article we provide a detailed forward-looking assessment of developments in the country.

Currency risks will remain elevated in 2020, as Turkey’s challenging economic condition leaves the lira exposed to risk-averse investor sentiment.

The potential introduction of US sanctions in response to Turkey’s purchase of Russian missile defense systems might pose particular risks to the lira and the wider economy.

Contractual risks are likely to be elevated in the construction sector, as the government looks to reduce spending on major infrastructure.

Security Environment

In September 2019, the Turkish military began joint patrols with US counterparts in northern Syria following an agreement to establish a safe-zone in the region.

Turkey perceives the entrenchment of the Kurdish militia group Yekîneyên Parastina Gel (YPG) in northern Syria, as a threat to its own sovereignty, given the YPG’s links to the Partiya Karkerên Kurdistan (PKK), which has pursued an insurgency in south-eastern Turkey since 1984.

Cooperation on the safe-zone should reduce near-term risk of both a Turkish offensive against the YPG, and YPG artillery attacks in Turkey.

The incentive of a US-Turkey free trade agreement may further deter Turkish military action against the YPG.

However, persistent divisions over US support for the YPG, and the territorial extent of the safe-zone, mean that military intervention by Turkey cannot be ruled out.

Update on political risks to monitor in TurkeyWhile tentatively cooperating with the US in northern Syria, the Turkish government is seen as likely to crack down on domestic Kurdish politicians.

On August 19, 2019, the government dismissed the mayors of Diyarbakır, Mardin, and Van, after they were accused of having links with the PKK.

The mayors all represented the pro-Kurdish Halkların Demokratik Partisi (HDP). During this period, 420 HDP party officials were also detained.

Actions against political parties are considered likely to elevate protest risks in Kurdish-majority areas in the coming months. Civil unrest followed the mayoral dismissals in August 2019, with police deploying water cannons and batons to disperse participants.

Trading Environment

The Turkish lira is likely to face renewed weakness in the coming quarters. The lira achieved limited gains in June and July 2019, reaching TRY5.60/USD in late July.

This occurred despite monetary easing and an aggressive rate cut by the Turkish Central Bank in July, where the key policy rate was cut from 24% to 19.75%.

However, persistent concerns over Turkey’s external position, domestic political risk, and low foreign exchange reserves mean the currency is particularly exposed to risk-averse market sentiments.

Continued global uncertainty in 2019 over trade relations, the global growth outlook, and Brexit are likely to make international investors more risk averse, reducing the value of the lira.

For example, the announcement of further tariffs between the US and China in August 2019 resulted in a 4.3% depreciation in the lira against the dollar.

The value of the lira will also be tested by anticipated additional rate cuts by the Central Bank and possible sanctions by the US.

The introduction of even limited sanctions in response to Turkey’s purchase of Russian S-400 missile systems could spur a lira sell-off, putting significant pressure on the currency.

Investment Environment

Pricing Outlook TurkeyContractual risks have risen moderately in Istanbul following the election of Ekrem İmamoğlu as mayor in June 2019. İmamoğlu, who represents Turkey’s principal opposition party Cumhuriyet Halk Partisi, announced in August 2019 that financial pledges made by his predecessors to Islamist associations with connections to the ruling AKP party would be cancelled.

The pledges reportedly totaled US$63 million. The move demonstrates a growing risk of alterations to, or cancellation of, contracts signed with companies perceived to be close to the AKP.

At the same time, the AKP has indicated that it will reduce spending on major infrastructure projects by suspending projects that have yet to be tendered or have yet to start.

Projects such as the Great Istanbul Tunnel and the Kanal Istanbul are particularly at risk of cancellation. Projects close to completion will face reduced risks.

5 Key Takeaways

  • The government has indicated that it will reduce spending on major infrastructure projects, by suspending projects that have yet to be tendered or are yet to start.
  • Cooperation between the Turkish and US military to establish a safe-zone in Northern Syria has decreased civil conflict risks in Turkey in the short term.
  • A crackdown by the Turkish government on Kurdish politicians will likely elevate the risk of protests in Kurdish-majority areas in the coming months.
  • The possibility of the introduction of sanctions by the US following Turkey’s purchase of Russian S-400 missile systems could increase pressure on the lira.
  • Turkey’s domestic political risk and low foreign exchange reserves make the lira particularly exposed to risk-averse market sentiments.

The monthly Risk Outlook is supported by our 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.

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Many of the countries featured in this month’s Risk Outlook could offer rewards for companies that are able to successfully navigate high-risk economic and political environments.

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

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  • Eleanor SmithEleanor Smith

    Eleanor Smith is a Senior Political Risk Analyst within Marsh JLT Specialty’s Credit Specialties team. At Marsh JLT Specialty, Eleanor analyses developments in political risks, and advises clients on their effect in a range of sectors. Eleanor is also responsible for delivery of World Risk Review, JLT’s country risk ratings platform, to clients and prospects.


    Eleanor has a first-class degree in History with Spanish from UCL, and a Masters in International Public Policy from the same institution. With experience in a range of sectors, including diplomatic missions and not-for-profit, Eleanor can help clients understand their risk exposure.

    If you would like to talk about any of the issues raised in this article, please contact Eleanor Smith, Senior Political Risk Analyst on +44 (0)20 8108 9544.

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