Political risk has increased significantly since the eruption of a corruption scandal in mid-December 2013. Triggered by the detention of more than two dozen suspects, including the sons of two Cabinet ministers on charges of graft related to questionable real estate deals, the scandal has breathed new life into a popular anti-government movement that had lost momentum following a bout of mass protests last summer.

Prime Minister Tayyip Recep Erdogan’s response to the crisis for his government, including a purge of police and prosecutors involved in the investigation, has mostly served to validate his critics’ claims that he harbors authoritarian ambitions.

The unfolding evidence suggests that the corruption scandal is but one front in a brewing political battle between the prime minister and Fethullah Gülen, a Muslim cleric with an international following numbers in the millions. The detractors claim that Gülen has been working to establish a “parallel state” within Turkey staffed by his followers, who include prominent figures in the police and the judiciary, academia, the media, and the business community.

Gülen was at one time an ally of Erdogan and the governing AKP, and although his educational and charitable organization, Hizmet, is officially non-political, its members have formed an important component of the electoral base that helped to carry the AKP to convincing election victories in 2003, 2007 and 2011. However, various state agencies and non-governmental institutions purportedly “infiltrated” by Gülenists have been accused by the prime minister of stoking anti-government sentiment by means of media criticism and false allegations against AKP officials.

The prime minister might be attempting to strengthen his hand by seeking a rapprochement with leaders of the military.

The political plot is thickening by the day. A proposal to tighten government control over the body responsible for appointing top judicial officials has been blasted by Erdogan’s opponents as a blatant attack on the constitutional separation of powers. And there are signs that the prime minister might be attempting to strengthen his hand by seeking a rapprochement with leaders of the military, whose political influence has been significantly reduced during his decade in power.  

Erdogan’s position could become tenuous in the next few months, particularly if the AKP makes a weak showing at local elections scheduled for March. While the Gülenists are probably not numerous enough to prevent an AKP victory, by simply staying away from the polls they might contribute to enough losses and close calls to convince the party membership that it is time for Erdogan to go.

Under the AKP’s own rules, Erdogan is serving his final term as prime minister. If he comes to be perceived as a liability for the AKP as it prepares for its bid to win a fourth consecutive term in 2015, the prime minister might come under heavy pressure to step aside before the completion of his term.

Even if the AKP manages to find some way out of the crisis that enables the party to maintain its dominant position over the medium term, it could take some time to repair the damage to Turkey’s international reputation that is inflicted in the meantime.

The escalating power struggle has thrown the independence of the country’s judiciary into doubt and raised troubling concerns about the extent of corruption within the government. This has further eroded the market confidence that had become notably stronger under successive AKP governments prior to the outbreak of widespread political turmoil in mid-2013.

Erdogan reportedly called upon Turkey’s ambassadors to take an active role in explaining to Turkey’s international partners that his government is engaged in a battle for its survival against “treacherous” foreign-backed enemies bent on wrecking the Turkish economy. If that is the goal of Erdogan’s enemies, all indications are that their plan is working.

The political turmoil erupted at a time when the lira was already under pressure amid speculation of an imminent scaling-back of the U.S. Federal Reserve’s bond-buying program. The currency has depreciated by 10 percent since the mid-December arrests, and in recent days has been setting new all-time lows against the dollar on an almost daily basis.

The central bank has responded by selling dollars. But with the annual current account deficit already totaling close to $56 billion through November, compared to a full-year shortfall of $47.5 billion in 2012, the depletion of foreign-exchange reserves is a potentially risky approach.

The Finance Ministry is doing its part to dampen demand for imports by hiking consumption taxes on some imported goods. But the sliding currency is also pushing up the cost of foreign-denominated corporate debt and contributing to inflation risks, factors that will add to pressure for the central bank to attract foreign capital by hiking interest rates, even at the cost of economic growth.

About The Author The PRS Group

The PRS Group is a leading global provider of political and country risk analysis and forecasts, covering 140 countries. Based on proprietary, quantitative risk models, the firm's clientele includes financial institutions, multilateral agencies, and trans-national firms.




www.prsgroup.com