Positively for political risk, long-standing tensions between the ruling moderate Islamist Justice and Development Party (AKP) and the military, which has traditionally backed the secular elite and has been involved in three military coups d’etat since 1960, eased in January. In the past two years, tensions have been exacerbated by an on-going investigation into the ‘Ergenekon’ group, a shadowy right-wing group accused of seeking to topple the AKP government by planning bomb attacks across Turkey in order to create an unstable environment in which military intervention could take place. Almost 200 people, including retired and active military officers, have been charged with belonging to Ergenekon. After months of wrangling, Chief of Staff General Iker Basbug ordered that the military’s secret archive be opened to the investigating judge. This move is a major step in reducing the power of the military in favour of the civilian government. Nevertheless, there are still important areas in which the military acts outside civilian control, including a lack of parliamentary authority over armed forces expenditure. The EU has made addressing the lack of accountability over the military a key requirement if Turkey is ever to gain membership. If EU membership were gained, the country could expect large inflows of FDI, which would help boost long-term growth.  

However, the political and security risk outlook remains undermined by two further challenges: Kurdish separatism in the south east of the country and the presence of al-Qaeda linked groups. In December the Constitutional Court banned the Democratic Society Party (the largest pro-Kurdish political organisation) for allegedly harbouring terrorists, raising tensions with the Kurdish community. Prior to this move, the government appeared to be adopting a more relaxed stance towards the Kurds. We fear that the latest move could contribute to a hardening of attitudes between Turkish and Kurdish nationalists, with the attendant risk of the social unrest and terrorist bombings that previously targeted tourist sites, curtailing short-term revenue inflows.

Meanwhile, the latest confidence surveys highlight uncertainty over short-term growth prospects. In December, the consumer confidence index reached 78.8 (up from 78.4 in November and 69.9 in December 2008), but well below the 100 level (over 100 indicates consumer optimism). Nevertheless, the business confidence index broke the 100 barrier for the first time since July 2009. In addition, the seasonally adjusted industrial production index recorded its fourth consecutive monthly increase to reach 108.4. Overall, we expect the economy to recover slowly in 2010 to 3.0%, well below the 6.8% average growth experienced in the period 2002-07; however, any downturn in the global economy would impact negatively on growth.