New elections in Turkey may prolong rather than end the political uncertainty which threatens to exacerbate Turkey’s domestic and external policy challenges, Fitch Ratings said in a written statement on late Aug. 28.
An interim government has been launched in Turkey before fresh parliamentary elections, which are scheduled for Nov. 1.
“The uncertainty has coincided with the breakdown of the peace process with the [outlawed] Kurdistan Workers’ Party
[PKK] and the start of military operations in Syria. This could be negative for the sovereign risk profile in the medium term, for example, if there were an escalation of violence within Turkey, or if the country is drawn into a protracted regional conflict,” said the rating agency.
Political risk in Turkey has long weighed on the country’s sovereign rating with concerns about discretionary policy making, government effectiveness and policy predictability, it added.
“The previous Justice and Development Party [AKP] government had formulated a reform program, but an extended electoral cycle may reduce opportunities for, and political commitment to, its implementation. The recent sell-off in emerging markets currencies, which saw the [Turkish] Lira hit an all-time low, highlights Turkey’s continuing exposure to shifts in investor sentiment, reflecting the role of portfolio and short-term capital inflows in deficit financing,” said Fitch.
More positively, the agency does not believe a political impasse presents an immediate risk to public finances, which have been kept on a close rein, it also said.
Political and policy risks in Turkey will be among the topics discussed at Fitch’s upcoming Global Sovereign Conference in Hong Kong this week, according to the statement.