How will Turkey’s currency crisis impact investors?

30 August 2018

President Recep Tayyip Erdoğan’s pursuit of increasingly unorthodox monetary policy has eroded investor confidence in Turkey’s highly leveraged economy. The US decision to double tariffs on Turkish metals in August 2018 triggered a sharp and sustained sell-off of the lira, which has lost almost 40% of its value against the dollar in 2018. A rising number of corporate defaults will pose counterparty risks.

Security Environment

Erdoğan was re-elected in June 2018 and has assumed new executive powers that were approved in a 2017 referendum. The post of prime minister has been abolished and Erdoğan is now able to unilaterally issue legislation. The risk of anti-government demonstrations is mitigated by the opposition’s acknowledgement of Erdoğan’s victory.

However, protests may re-emerge in major cities such as Ankara and Istanbul in the one-year outlook, particularly as the price of essential goods rises due to lira depreciation. Protests would pose a moderate risk of collateral property damage, but security forces are likely to disrupt protests quickly with water cannon and tear gas.

The risk of terrorism in Turkey remains high but is declining, as the number of attacks fell from 542 in 2016 to 181 in 2017. The Kurdistan Workers’ Party (PKK) and its affiliates may carry out improvised explosive device attacks in major cities, and Islamic State (IS) continues to operate in Turkey. In June 2016, Istanbul Atatürk airport was temporarily closed following an IS suicide bomb attack that caused over 40 fatalities.

Trading Environment

President Erdoğan has undermined investor confidence in Turkey’s institutional capacity, particularly following his re-election in June 2018. After promoting his son-in-law to the role of finance minister, Erdoğan passed a decree allowing him to appoint senior officials of the central bank. He has also stepped up his longstanding criticism of higher interest rates, dashing market expectations of a rate rise to address inflation that has hit 15%.

As financial conditions tighten in wealthy economies and prompt capital outflows from emerging markets, these moves have added to concerns about Turkey’s external vulnerabilities. Erdoğan has overseen a boom in foreign-currency borrowing that has helped to fuel rapid economic growth. However, it has also resulted in a large current account deficit that reached 6.5% of GDP by the end of the first quarter of 2018.

Amid worsening relations over Turkey’s refusal to release an American pastor detained on terrorism charges, the US decision to double tariffs on Turkish steel and aluminium sparked a rapid sell-off of the lira in August 2018. The lira has lost almost 40% of its value against the dollar this year, which will drive a sharp slowdown in real GDP growth from 7.4% in 2017 to a forecasted 1.5% in 2018.

Turkey has announced a number of temporary measures to alleviate pressure on its currency, including a pledge from Qatar to invest USD 15 billion. Finance Minister Berat Albayrak has also promised to unveil an economic plan in September 2018, but anything short of tighter monetary and fiscal policy is unlikely to restore economic stability. Capital controls cannot be ruled out but are likely to only be used as a last resort.

Turkey’s government debt-to-GDP stood at a relatively modest 28% at the end of 2017, and foreign currency debt comprised only 11% of this figure. However, sizeable risks lie in the corporate sector, which has amassed almost USD 300 billion in foreign-currency debt. The lira’s sharp depreciation will lead to a growing number of corporate defaults, particularly in the energy, real estate and construction sectors, as firms face difficulties in meeting external debt obligations.

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Investment Environment

Turkey’s agribusiness sector will benefit from rising sugar production, but the lira’s depreciation will reduce domestic demand for soy imports and rising fuel costs will erode producer margins. The risk of expropriation and contract alterations has increased since the failed coup in July 2016. The Turkish government has seized over 1,000 companies with perceived links to opposition movements, although wholly foreign-owned firms are less likely to be targeted.

The risk of further US barriers to trade will weigh on the Turkish investment environment. In addition to raising metals tariffs, President Donald Trump imposed sanctions on two Turkish officials in August 2018. Turkey has responded to US actions by calling for a boycott of US electronic goods and imposed tariffs on a number of US products such as cars and cosmetics. The Trump administration has warned that it is prepared to implement further barriers to trade if the detained American pastor is not released by Turkey.

Turkey Pricing Table
† Pricing would be a minimum of 2.0% where the counterparty is a state-owned bank. As a result of the lira’s volatility, most insurers are unwilling to write these risks.

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

World Risk Review September 2018

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.

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For further information, please contact Eleanor Smith, Senior Political Risk Analyst on +44 (0)121 626 7837 or email