End May, protests against plan to redevelop Istanbul’s Gezi Park began and were raided by the police a few days later,. Following the raid, protests spread to the rest of the country. Protesters accuse Prime Minister Erdogan to be increasingly authoritarian and to pursue an Islamist agenda, threatening Turkey’s secular political tradition. Mr Erdogan strongly condemned the protest and rallied his own supporters. Protests have eased now as police cleared the Gezi Park, the focal point of unrest. Police repression is reported to have been harsh, some people died and many were injured. Mr Erdogan has been Turkey’s Prime Minister since 2002 and secured his third sweeping victory in 2011. The government is unlikely to be threatened as opposition is divided and Mr Erdogan still benefits from widespread support as he is credited to have brought Turkey unprecedented political stability and economic expansion. As a matter of fact, Turkey has come a long way since it was struck by a devastating financial crisis in 2001 and has become a totally different country over the past decade by tackling its traditional sources of fragility. The fundamentals are quite strong compared to a decade ago (higher GDP per capita, lower inflation, lower public debt, lower budget balance deficit, lower external debt and debt services). However, the short-term debt has increased as well as the current account deficit which reached 6% of GDP in 2012 and is expected to increase further to 6.8% in 2013.

Impact on country risk

The Lira and Turkish asset prices have been under pressure. This reflects a reversal of capital inflows to emerging countries as the US Federal Reserve is lowering its extraordinary accommodative monetary policy in the US. Moreover, capital inflow reversals are reinforced by political uncertainty triggered by anti-government protests. Capital outflows are particularly a concern in Turkey as the country finances its high and increasing current account deficits by short-term capital flows rather than by long-term financing such as foreign direct investment. Reliance on short-term financing is the main reason why ONDD classifies the short- term political risk in category 3 out of 7 and the long-term political risk in category 4 out of 7. Except if confidence is restored, capital outflows could accelerate and reinforce the lira depreciation.

Analyst: Pascaline della faille, p.dellafaille@credendogroup.com