Turkey: Risk Assessment

Country Risk Rating

B Political and economic uncertainties and an occasionally difficult business environment can affect corporate payment behavior. Corporate default probability is appreciable.

Business Climate Rating

A4 The business environment is acceptable. Corporate financial information is sometimes neither readily available nor sufficiently reliable. Debt collection is not always efficient and the institutional framework has shortcomings. Intercompany transactions may thus run into appreciable difficulties in the acceptable but occasionally unstable environments rated A4.


  • Healthy public finances
  • Demographic vitality and qualified labor force
  • Key regional position
  • Market with 75 million inhabitants and rising middle class
  • Healthy and robust banking sector since the 2002 reforms


  • Substantial current account deficit and insufficient domestic savings
  • Dependence on foreign capital, notably portfolio investment
  • Foreign-currency debt among companies and banks, accentuating their exposure to currency risk
  • Significant share of the informal economy
  • Delicate external and domestic political situation (Kurdish question, Syrian and Iraqi conflicts, coup attempt)
  • Authoritarian drift of the executive

Current Trends

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Growth likely to remain moderate in 2016, lifted by consumption

Growth is likely to again increase moderately in 2016, despite a slight decrease. Indeed, the troubled political context both internal (conflict between the power and Kurdish rebels, terrorist attacks, attempted coup) and external (war in Syria and in Iraq) will continue to weigh on internal and external demand. However, household consumption would remain the main driver, supported by rising wages (minimum wage increased by 30% on January 1st) and employment, as well as several measures aimed at encouraging credit. Private investment already affected by the less favorable financial situation for companies which, particularly in the manufacturing sector, have seen the cost of their imported inputs and debt service increase due to the depreciation of the lira, could suffer from degraded context,. External trade should contribute negatively to growth, owing to the lasting impact of Russian sanctions on exports and the disaffection of foreign tourists.

Inflation will probably remain high in 2016, well above the central bank’s 5% target, mainly as a result of rising food prices fostered by the weakening of the currency, bottlenecks in agriculture and the lack of competition in retailing. The central bank could be constrained to end the downward cycle in rates in order to not weaken the lira and promote imported inflation. In the case of new deterioration in the political situation, the central bank might even tighten its policy.

Solid public finances, but still fragile external accounts

The weight of public debt should remain low and the fiscal deficit modest despite subsidized air transport to bolster tourist arrivals, increased public payroll in tourist regions in order to reduce unemployment, and monthly allowance of 100 lira disbursed to companies for each wage under 2250 lira to partly offset the increase of the minimum wage. The payment of 3 billion euro scheduled in the agreement reached with the EU for refugee management, if held, would slightly offset expenses incurred.

Despite two years of decline the current account deficit remains high. It might rise again. The increase in sales on the European market, driven by the lira depreciation, and the reduction in the energy bill could be largely offset by the Russian sanctions lasting impact on food sales and construction contracts (sanctions adopted following the destruction of a Russian military jet by Turkish artillery on November 2015, but officially lifted in August 2016), as well as the free fall in the number of foreign visitors. Managing this current deficit will remain a major challenge: due to the weakness of FDI and the lack of domestic savings, the country depends on foreign portfolio investment whose volatility is potentially increased by the deterioration of the political situation. The currency is especially high for Turkish companies as they have a high level of short-term debt in foreign currencies. The country’s foreign exchange reserves could prove to be insufficient in the event of sudden capital outflows.

Strengthening of the President in a difficult regional environment

Ironically, the attempted coup of July 15th 2016 could strengthen, at least in the short term, President Recep Erdoğan’s position. He ordered massive opponents arrests, thousands of soldiers, magistrates, journalists and teachers suspected of involvement in the coup and/or connivance with Fethullah Gülen, who is himself charged with the instigation of the coup. The state of emergency was declared for 3 months from the 27th of July, allowing the president to govern through decrees which, after being approved by the Parliament dominated by the Islamic-conservative party of the president (AKP), will be exempted from the Constitutional Court control. Nevertheless, the political polarization of the society, the Kurdish question and the Syrian conflict spillovers onto the national stage (terrorism, refugees) remain major issues, while the army is weakened.

Despite signs of brightening (normalization of relations with Israel, reconciliation with V. Putin, lifting of international sanctions against Iran), the Turkish foreign policy will remain complicated by the concern to curb the strengthening of the Kurds in Syria, supported by the Turkish Kurds of the PKK, while at the same time combating ISIS, and by the recent deterioration of relations with the United-States and the European Union.


Coface (09/2016)