Turkey: Syria offensive strains US relations

28 February 2018

After rapid growth in 2017, Turkey faces a more challenging economic environment this year. Geopolitical headwinds have increased in 2018, following the launch of an offensive in northern Syria in January and increased tensions with Cyprus in February 2018. However, the government’s ambitious plans to diversify its energy mix ensure that there are significant opportunities in the renewables sector.

Security Environment

In January 2018, Turkey launched Operation Olive Branch, an air and ground offensive against the Kurdish YPG (People’s Protection Forces) in Syria’s northwest Afrin region. Syrian government-backed forces were sent to reinforce the YPG in February, drawing Turkey deeper into the Syrian conflict and damaging investor confidence, with the lira weakening by as much as 1.5% against the US dollar on 20 February 2018. The operation has also severely strained relations with the US, whose troops are stationed with YPG forces in the town of Manbji near the Syria-Turkish border, and risks intensifying broader Turkish-Kurdish conflict.

In addition to the threat posed by Islamic State (IS), businesses operating in Turkey may therefore be exposed to an increased terrorism risk from the Kurdistan Workers’ Party (PKK). The PKK is known to target energy infrastructure, and in February 2016 the group attacked the Kirkuk-Yumurtalik oil pipeline, rendering it inoperable for a week. The Turkish military offensive in northern Syria has also increased the likelihood of protests in major cities and in southeast Turkey. By early February 2018, 124 people had been detained for participating in protests against the operation.

Tensions between Turkey and Cyprus are also elevated. In February 2018, Turkish warships blocked an Italian rig from reaching a site on the coast of Cyprus, before a Turkish patrol boat damaged a Greek coast guard vessel during a collision. Shipping routes near Cyprus are likely to be disrupted by the Turkish navy, causing business interruption. However, escalation into interstate conflict remains unlikely.

Trading Environment

Turkey faces a slowdown in real GDP growth from an estimated 6.5% in 2017 to a forecasted 3.6% in 2018, driven by policy tightening and reduced availability of credit. Turkey’s current-account deficit widened last year to 5.6% of GDP following a period of expansionary economic policies, while annual inflation stood at 11.92% by the year’s end. Political tensions will weigh on foreign direct investment.

The lira has lost almost 6% of its value against the dollar since the beginning of 2017 and will remain volatile. Further depreciation is likely and will expose Turkish companies to difficulties in meeting foreign-currency debt obligations. In February 2018, Yildiz Holdings, one of Turkey’s largest companies, requested to restructure USD 7 billion in loans. While lira weakness will also weigh on the government debt position, Turkey’s debt-to-GDP ratio stood at 28% at the end of 2017, while government foreign currency debt was also comparatively modest at 36% of total debt by the end of 2016. The weakness of the lira is also an added incentive for the Turkish government to reduce its reliance on coal and gas imports.

Investment Environment

Turkey’s total renewables capacity is expected to more than double by 2026, rising from its current 10GW to 26GW, driven primarily by growth in wind energy production. However, the independence of the judiciary has also been undermined, as nearly a quarter of judges have been dismissed since the coup attempt. The risk of expropriation and contract alterations has increased since the failed coup in July 2016. In September 2016 for instance, Turkey’s bank regulator took control of Boydak Holding, a conglomerate with interests in renewable energy, as a result of its alleged ties to opposition movements. Wholly foreign owned firms are less likely to be directly affected, and power sector diversification has received strong government approval.

There is a significant risk of the US Treasury imposing punitive measures against Turkish banks following the January 2018 conviction of Mehmet Hakan Atilla, a former executive at Turkish state-owned lender Halkbank. The prosecution implicated Halkbank and other Turkish lenders in a scheme to evade US sanctions on Iran, although large fines are more likely than sanctions. In addition to further straining US-Turkey relations, financial penalties would dampen investor sentiment and lead to a tightening of credit conditions.

Pricing Outlook Turkey

** Pricing could be subject to upwards pressure in the near future due to significant capacity constraints

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

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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, Political Risk Analyst on +44 (0)121 626 7837 or email eleanor_smith@jltgroup.com


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