- The document analyzes political and economic risks in Turkey, forecasting moderate risks to international business over 18 months and 5 years. - Recent elections failed to form a governing coalition, necessitating another election in November, prolonging political uncertainty. Support for the pro-Kurdish HDP party is increasing. - Renewed conflict between Turkish forces and PKK militants, as well as involvement in fighting ISIS, compound security risks. The election call and rejection of peace talks have aggravated domestic turmoil, undermining stability and investor confidence.

1. Political Risk Services
14-Sep-2015
Turkey: Flash Forecast
FORECASTS OF RISK TO INTERNATIONAL BUSINESS
Turmoil
Financial
Transfer
Direct
Investment
Export
Market
18-Month: Moderate B- B+ B
Five-Year: Moderate C B- C+
KEY ECONOMIC FORECASTS
Years
Real GDP
Growth % Inflation %
Current
Account ($bn)
2010-2014(AVG) 5.4 7.9 -55.89
2015(F) 3.0 7.4 -44.50
2016-2020(F) 3.5 6.0 -52.30
Uncertainty, Instability, and Insecurity Will Erode Confidence
The political uncertainty created by the inconclusive result of a general election held in early June will persist
for at least several more months, as the failure of the incumbent Justice and Development Party (AKP) to
reach a coalition agreement with either the Republican People’s Party (CHP) or the Nationalist Movement
Party (MHP) has necessitated the calling of a snap election that will be held in November. That appears to
have been the outcome desired by President Recep Tayyip Erdoğan, who is counting on a second election to
restore the AKP’s parliamentary majority, thereby facilitating his pursuit of constitutional reforms aimed at
replacing the current parliamentary model of government with a presidential system.
The AKP’s loss of its majority at the June election was almost entirely attributable to the fact that the People’s
Democratic Party (HDP), a political vehicle for the aspirations of Turkey’s Kurdish minority population,
exceeded the 10% minimum vote share required to qualify for seats in the Grand National Assembly (GNA),
thereby reducing the number of seats apportioned among eligible parties. Any chance that the AKP might
reclaim its majority status at the November polls hinges on the HDP failing to repeat that feat. Erdoğan’s
strategy for achieving that objective has contributed to an increase in domestic turmoil that may be difficult
to reverse.
The call for a second election in the space of four months came against a backdrop of renewed armed conflict
between the Turkish military and the militant Kurdistan Workers’ Party (PKK), with whom the AKP
government had been working toward a peace deal, with varying degrees of enthusiasm, for several years.
Although there is debate as to who is responsible for the collapse of a cease-fire that had held since 2013, the
opposition parties contend that Erdogan blocked efforts to form a coalition government, and torpedoed the
peace process he once championed in hopes of driving voters away from the HDP in an early election that he
assumed would happen from the start.
There is certainly merit to that argument. In mid-July, the president declared invalid a preliminary
agreement on the outlines of a long-term peace deal that was hammered out earlier this year between
members of the AKP government and representatives of the HDP. Significantly, Erdogan based his rejection
of the agreement on the HDP’s alleged collaboration with a terrorist organization (the PKK). The aggressive
assault on the HDP’s legitimacy serves no clear purpose except as an electoral tactic, which suggests that
Erdogan was already plotting his strategy for an early election more than a month before the deadline for
reaching a coalition agreement.

2. The resumption of deadly attacks by the PKK, which have mostly targeted police, has compounded security
risks stemming from Turkey’s belated assumption of a role in international efforts to combat the Islamic
State of Iraq and the Levant (ISIL), a jihadist group that controls large swathes of territory in both Iraq and
Syria. Just three days after Erdogan renounced the Dolmabahce Agreement, a suicide bombing at an anti-
ISIS rally in Suruc left more than 30 people dead and injured more than 100 others.
The most recent polls indicate that support for the HDP is actually increasing, with its current level of
support coming in slightly above the 13% vote share won by the party in June. On that basis, it would seem
that another election will do nothing to promote political stability.
Indeed, the risks of may well increase. If the AKP suffers a further erosion of its support, it is not
inconceivable that the CHP, the MHP, and the HDP might agree to put aside their differences in pursuit of
the shared goal of pushing the AKP out of power. However, even if such a move was successful—which is
hardly a given, not least owing to Erdoğan’s certain strong resistance—the inherent incompatibility of the
nationalist and pro-Kurdish stances of the parties in an anti-AKP coalition would doom it to an early demise.
The steady slide of the currency accelerated after the announcement of the snap election, a reflection of
investors’ discomfort with the political uncertainty. Unfortunately, the outlook for positive developments
that relieve the anxiety is not bright. Indeed, a looming national vote of crucial importance to the president
creates a high risk of fiscal slippage that further erodes the confidence of investors, to the detriment of
medium-term economic performance.