Following growing tensions with President Erdogan, former Prime Minister Ahmet Davutoglu stepped down. He was replaced by Binali Yildirim, a close ally of Mr Erdogan’s. The new PM vowed to support the adoption of a new constitution to create a presidential system – a move requested by President Erdogan – and to continue the fight against the Kurdish rebels in southeast Turkey. Mr Simsek, an anchor of investor confidence, remains in his post but his new role was curbed.

Impact on country risk

The new Prime Minister faces a deteriorating economic environment. Indeed, non-performing loans in the banking sector are on the rise albeit from a low level. Moreover, the number of tourist arrivals has sharply fallen due to the increasing insecurity and rising tensions with Russia. As tourism accounts for more than 10% of current account receipts, this is likely to weigh on the current account deficit which narrowed from 7.7% of GDP in 2013 to 4.4% of GDP last year thanks to lower oil prices. This, along with the rising doubt about the macroeconomic policy credibility, could take a large toll on investor confidence. This is of particular concern for Turkey, where – despite strong growth resilience, sound public finances and the narrowing of the current account deficit – external imbalances remain significant and a growing share of external debt is short-term. Turkey is therefore vulnerable to capital outflows. In case of sharp capital outflows, the lira would depreciate further (cf. graph) and banks and non-financial corporates could face difficulties in rolling over their maturing debt. In such scenario, corporate bankruptcies are likely to rise further and hence asset quality of the well regulated and well capitalised banking sector to deteriorate further. Indeed, over the past few years, the corporate indebtedness (often denominated in foreign currency) increased sharply. Analyst: Pascaline della Faille, p.dellafaille@credendogroup.com Turkey_grafiek