Mid-December 2013 saw the eruption of a corruption scandal involving businessmen and key position holders with government ties. Among them were the sons of three ministers, which led to the resignation of their fathers. Prime Minister Erdogan, responded to corruption allegation by sacking senior police officers in Ankara and Istanbul. As a result, thousands took to the streets, calling for Prime Minister Erdogan’s resignation but protests did not reach the scale witnessed in May-June 2013. The crisis has forced Mr Erdogan to reshuffle his government. Ten new ministers who are loyal to Mr Erdogan were appointed.
However, political uncertainty remains high ahead of the municipal and first direct presidential election and parliamentary election scheduled in March 2014, August 2014 and June 2015 respectively. The parliamentary election could even be held earlier. The recent events highlight increasing tensions between Mr Erdogan and his former ally Mr Gülen. The Gülen movement, a Turkish nationalist religious organisation which promotes a moderate Islam and dialogue between religions, has supporters throughout society. Its members are thought to hold influential positions in Turkey’s institutions, especially in the police, judiciary and prosecution service.

Impact on country risk

Turkey has been one of the most affected emerging markets following the US Fed tapering announcement. This reflects economic concerns, amplified by political concerns. After all, Turkey finances its high and widening current account deficits with short-term capital flows rather than by long-term financing such as foreign direct investment. As a consequence, the Turkish lira has fallen to a record low against the US dollar end 2013. Credendo group’s political risk classifications have already taken into account the large reliance on volatile short- term capital flows and are thus expected to remain stable. The systemic commercial risk could be negatively impacted by the lira depreciation and the curb in domestic credit as banking sector reliance on foreign funding has increased over the last few years.

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