With the deteriorated domestic political situation, rising unemployment and inflation increased by higher food prices due to the weaker currency, household consumption is likely to pause for breath in early 2017. Further out, unless the political and security situation further deteriorates, it could pick up again, but far less quickly and remain the driver behind activity. Consumption should be underpinned by the countercyclical budgetary policy, for which support measures should represent 0.5% of GDP for the year. Households have benefited from the restructuring of their tax debts and consumer credits arrears. The 30% increase in the minimum wage in 2016 should continue to have a beneficial impact. Despite a support program including lower taxes and social charges, debt relief, as well as credit facilities to favour exports, renewable energies, research, foreign investment and the regions affected by terrorism, private investment could stagnate. Public investment should maintain its comfortable growth with further major infrastructure work in energy and transport. The contribution to growth of trade in services and goods became negative in 2016 after the tourism industry collapsed (41% less revenue over the first nine months of 2016, in a sector accounting for almost 10% of GDP), and could be neutral in 2017. With the lifting of Russian sanctions from August 2016 and aid for tourism (USD 500 million), sales of agrifood products and the number of tourists could increase. Car, household electricals and clothing sales should benefit from robust demand in Europe and the depreciation of the Turkish lira. The construction sector could benefit from its diversification into Africa and the recovery in nearby markets. In terms of imports, the likely increase in energy prices should be partly offset by the downward impact of the lower pound on purchases of imported goods and the higher tax on vehicle purchases (from 45% to 160% depending on the engine type), 69% of which are imported. However, monetary policy is likely to influence the pace of the recovery. If the domestic political situation were to worsen, provoking investor mistrust and a capital flight, the central bank would face a dilemma. Should it accept a further depreciation of the pound, which is worrying for the population with a 10% decline against the euro and the dollar prompting additional inflation of 1.8% over the next 12 months, or should it raise its key interest rates in order to counter the depreciation at the risk of weighing on activity? The central bank was already obliged to implement a first rate hike in November 2016 in a move unseen since 2014.

In view of the support plan and momentum in infrastructure construction, the public deficit is likely to increase and move towards 3% of GDP. The EU’s ongoing payments under the agreement on refugee management and savings on current spending should only partly offset this. However, the weight of debt is likely to remain weak. A source of concern nevertheless lies in the state guarantees provided under the framework of private/public partnerships. After two years of decline, the hefty current account deficit caused by the trade deficit and debt servicing is likely to increase. The slow recovery in tourism and the beneficial impact of the lira’s depreciation on exports may not fully make up for the increase in the cost of imports and debt servicing, influenced both by the depreciation and the hike in rates. Managing the current deficit is a major challenge: given the weak level of foreign direct investments and the lack of domestic savings, the country depends on foreign portfolio capital investments, the volatility of which is increased by the deteriorated political situation. Exchange rate risk is high for companies and banks with high debt in foreign currencies, even if plenty of them have resources in currencies and some of the debt corresponds to commercial credit that is not very volatile. Exchange rate reserves could prove insufficient in the event of a sudden and massive withdrawal of capital, obliging the state to intervene.

The attempted coup on 15 July 2016 helped president Erdoğan strengthen his position. The state of emergency declared on 27 July 2016 enables him to govern by decrees, which (after approval by Parliament where the governmental islamo-conservative party, AKP, has the absolute majority since the early elections called in November 2015), are exempt from the control of the constitutional courts. The servicemen, magistrates, journalists, teachers and corporate heads accused of being involved in the coup and/or of conniving with the fraternity of the preacher Gülen, considered by the government as the instigator of the coup, have been arrested in large numbers. The immunity of deputies accused of backing the armed Kurdish movement (PKK) has been removed. Investors could be alarmed by the instrumentalization of the Kurdish issue, the implication in the Syria/Iraq conflict and its local overflows (terrorism), the switching between the US and Russia, the use of nationalist and religious motivation as well as breaches to the rule of law (referendum validating the presidential pre-eminence planned for spring 2017). Positive signs exist: return to normal relations with Israel, Russia and Egypt, the end to international sanctions against Iran, the construction of gas pipelines, reform of the job market, acceleration of company creation formalities or development of household savings to reduce the dependency on foreign capital.