Recep Tayip Erdogan won the first round of presidential elections on 10 August despite the middle-class protests of mid-2013 and the corruption scandal that erupted end 2013. Indeed, the former Prime Minister is credited for bringing Turkey unprecedented political stability and for improving the living standards of the working and lower middle classes. Ahmet Davutoglu, the former foreign minister, replaced him as Prime Minister and formed a new government.

Impact on country risk

The presidential function is highly representative in Turkey. Indeed, until now, Mr Erdogan’s attempts to change the constitution in order to transfer executive power from the Prime Ministry to the Presidency failed as the AKP party lacks the needed majority and therefore has to reach a compromise with the opposition parties. However, the opposition has so far refused to change the constitution out of fear that the authoritarian tendencies of Mr Erdogan will increase. This could change if the AKP party would win a two- thirds majority during the next legislative elections scheduled for June 2015. On the economic side, policy continuity is expected as the new government is largely unchanged. Turkey’s Achilles’ heel remains its large structural current account deficit financed by short-term capital flows. This leaves the currency highly vulnerable to change in investors’ confidence as witnessed in mid-2013 (US Fed tapering announcement and large protests in Turkey) and in the beginning of 2014 (episode of emerging market assets sell-off).
Credendo Group’s political risk classifications are expected to remain stable as they already take into account the large reliance on volatile short-term capital flows and risk of spillover effects from the war in Syria and Iraq and the fragile ongoing peace process with the Kurds. On the positive side, Turkey’s economic fundamentals are strong: exports are well diversified, public finances are solid and the external debt burden is moderate. The banking sector is well regulated and capitalised although heavily reliant on short-term funding.

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