“After the attempted coup in 2016, the political landscape in Turkey has become polarised. President Erdoğan has increased his grip on Turkish politics. Turkey has with the elections this summer completed its transition to a presidential system. We expect the constitutional reform to limit the control by the Turkish parliament and judiciary over the government and the president,” says Victor Carstenius, Senior Country Analyst at EKN.
The current account deficit and dependence on foreign financing are the main economic risk factors. The country’s weak exports and unbalanced growth, which is driven by domestic consumption, have contributed to this development.
Growth was as high as seven per cent in 2017, thanks to fiscal policy stimulus and government subsidised loans. The current account deficit therefore grew significantly during 2017. At the same time, capital inflows have weakened, due to expectations of tighter global monetary policy and domestic political uncertainties, to the point where they barely cover the current account deficit.
“The weak balance of payments, rising inflation and the question mark over the independence of the central bank have caused the currency to depreciate significantly for a number of years. The risks are spilling over into the banking and corporate sectors. Companies indebted in foreign currency will be negatively affected, which is a credit risk for the banks and, by extension, also for the government,” says Victor Carstenius.
EKN has also decided to downgrade Iran from country risk category 5 to country risk category 6. The reason is that the US is withdrawing from the nuclear agreement with Iran and reintroducing sanctions against Iran. This means that the risk of payment problems has increased. International banks that follow US sanctions cannot be involved in Iran-related transactions after November. Payments that are to be made after November risk being stuck in Iran when the payment channels disappear.
EKN is also upgrading Fiji from country risk category 6 to country risk category 5. The main reason for the upgrade is that, despite the destruction caused by Cyclone Winston in 2016, Fiji’s economy has demonstrated strength. That such a small and vulnerable economy has recovered so quickly is an indication that the country is moving in a positive direction.
EKN monitors developments in the countries of the world and evaluates the risk of payment difficulties. The assessment is summarised in a country policy in which we state the country’s risk classification on a scale of 0 to 7. The lower the figure, the better the country’s credit rating. The evaluation is continuous and is also subject to regional reviews in collaboration with other OECD countries.