Turkey’s Hidden Risks in 2013
During my meetings with investors in London last month, everyone asked whether the country’s large current account deficit could pose a threat next year. Only one person inquired about political risks before I mentioned them.
Here is the intro. to a recent Hurriyet Daily News (HDN) column of mine, where I argued that political risks are completely ignored, and therefore not priced, in Turkey at the moment. As you may (or may not) know, Economonitor is running a special theme this week: “The biggest risk for 2013 that no one but me is worried about”. The “no one but me” part is key; without it, I could have easily mentioned the Balance of Payments, but with the current account artificially improving, thanks to the gold exports to Iran and the economic slowdown (confirmed today by the dismal growth figures, which I will discuss in Friday’s HDN), I would have to work hard to make a case anyway:)
I mentioned several political risks in the column. Have a look at the column first. Once you are done, you can read my subjective assessment of those risks, which I have labelled as medium or high-risk:
Gold exports to Iran (medium): Turkey is at the moment very cool about having to face a “abide by sanctions or else” ultimatum from the U.S. For one thing, Economy Minister Zafer Caglayan dismissed the threat, noting that Turkey only follows multinational agreements and is not obliged to obey U.S. sanctions to Iran. That may be the case in theory, but it doesn’t work like that in practice. On the other hand, while I am no politics expert, I don’t think the U.S. would want to alienate Turkey, and the country is planning on making up for some of the lost gas from Iran with Russia. GlobalSource analyst Atilla Yesilada argues, on the other hand, that there is a risk that Russia could halt gas to Turkey if it comes to conflict with the country regarding Syria.
Financial Action Task Force Blacklisting (medium): It is a medium risk because I really don’t think the government is stupid enough to be blacklisted. They’ll probably make the necessary changes soon, or worst, they’ll get an extension. And if you are not very familiar with the issue, have a look at fellow HDN columnist Guven Sak’s recent column.
Middle Eastern risks (high): As I showed in the column, trade with the Middle East has already plunged. It could get much worse. A recent Financial Times article has all the details. And I did not even mention the Kurds in the column: Ethnic conflict between Kurds and Arabs in Syria or growing acts of terrorism in Turkey…
Gul/Erdogan Row (high): This could be a major thing a year or so from now, as the Presidential elections in Spring 2014 draws close. The litmus tests will be whether Erdogan will continue weeding out Gulenist bureaucrats or whether Gul will become increasingly critical of the government. On the other hand, IMHO, if it is really the case that Erdogan will not be able to implement a new Constitution and Presidency with increased power, as the Financial Times is claiming, it may actually be positive for political risk, as he may not go for the Presidency.
Babacan leaving the government early (medium): This is medium only because this is just a rumor at the moment, and so I don’t assign it a lot of probability. But once this risk seems like materializing, it would immediately be a high-risk item.
These are quite a few political risks for you. But one advantage of these is that, unlike BOP risks and a sudden stop, they are quite easy to spot. You know Babacan is leaving when he leaves, for example:) I mean, you’ll have time to react before his probable replacement Caglayan starts doing his market-frightening theatrics.
And just to cheer you up a bit: A reader who knows what he talking about told me that France was reconsidering its position in the EU accession chapters it has blocked: Economic and monetary policy, agricultural policy, regional policy, financial and budgetary provisions as well as a chapter on institutions. This is good news,but Turkey is very far from EU negotiations (both mentally and physically) at the moment. Of course, this is not only Turkey’s fault. The EU has enough trouble already, but still unfortunately this is the reality today. But good news is good news, right? Especially after having read through all those political risks:)…
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