Is Turkey’s new story ‘elevated geopolitical risks’?

Turkey’s agenda since the election has been dominated by escalating geopolitical risks. 

Two hot examples are the recent downing of the Russian jet on the border and the shipment of Turkish troops and armored vehicles to Iraq. The reaction to the first one has come in the form of economic sanctions from Russia, and this has sounded the alarm in international finance circles. Coming after the jet incident, the news about the shipment of Turkish troops to Iraq will probably increase the geopolitical risk perception to an even higher level.  

As the consequences of these incidents reflect on economic figures, the new story of fragility will become more concrete. The first sign of this came from an international credit rating agency: Moody’s kept Turkey in the “Baa3” investment level, highlighting the geopolitical risks.

In the Moody’s statement, three themes stand out in particular: One is the mention of how there is a lack of economic reforms on the horizon. Another is that the negative turn, once defined as a “rise in political uncertainties,” has been replaced by “elevated geopolitical risks.” Another is its discussion of erosion in what is defined as “institutional strength.”   

In the statement issued on Dev. 4, Moody’s affirmed Turkey’s “Baa3” government debt and issuer ratings and maintained the negative outlook. It said slowing growth and diminishing external confidence could only be improved with political stability and a broad economic reform program.

However, it also said Turkey continues to operate in a fragile financial and geopolitical environment, and its high external financing needs expose it to the risk of a shock. 

Like me, Moody’s is uncertain about economic reforms. It is not sure whether the new government has any great appetite for implementing genuine reforms. 

This is how Moody’s defines Turkey’s outlook: Heightened geopolitical risks, pressures on external financing and the prospect of weaker growth in the medium term.
 
Last week, Prime Minister Ahmet Davutoğlu said the government’s reform program and calendar would be issued this week. Similarly, last year at the beginning of November, declarations of empty “transformation programs” were announced as “reforms.” Considering this, the statements set to be announced this week already lack credibility.

If a constitutional amendment package - themed with the “presidential system” - is mentioned in connection to the economic reforms, or if a calendar is presented stating that reforms will be tied to the constitutional amendment, then any hopes will shatter. 

Ankara’s policy has been to leave the economy to drift, confident that the U.S. would not hike rates. This policy is now approaching a bottleneck. The international picture shows that the U.S. Federal Reserve will likely hike interest rates on Dec. 16. There is no possibility to keep rates low domestically. For this reason, it is not possible for Turkey to proceed with the “old story.” Comprehensive reforms should be included as part of a “new story.”

However, as a country facing elevated geopolitical risks, Turkey faces trouble emerging from the intersection it is at. When the U.S. is tightening, and when in Europe even an abundance of money is still parked in central banks, no money will flow to a country with elevated geopolitical risks - even if it does need external financing.