Turkey Number Ten on Eurasia group top threats for 2014

Turkey Number Ten on Eurasia group top threats for 2014.HT: Eurasia.

Important economic, security, and social risks will intensify and converge in Turkey in 2014, promoting greater volatility for business and markets. We’ve already included Turkey among our diverging markets because of the risks surrounding the upcoming electoral cycle.

But among emerging markets, stability in Turkey is especially vulnerable from a range of directions. In particular, Turkey is facing serious spillover effects from the ongoing civil war in Syria and a reemergence of the Kurdish insurgency; and Erdogan’s increasingly emotional and aggressive behavior threatens to further unhinge market and investor confidence.

In the aftermath of the Gezi Park protests last year, Erdogan refocused on mobilizing his political base and has stepped back from his earlier forward-leaning outreach to the Kurds, pushing the peace process with the Kurdistan Workers’ Party (PKK) toward collapse. There is a very high chance that the PKK cease-fire will break down after March’s local elections. If so, sustained guerrilla activity will resume over the summer.

In addition, Turkey, like Iraq, is increasingly vulnerable to a spillover of violence from Syria, in particular to potential Al Qaeda–linked attacks in border towns as Turkey continues to wind down its support for militant Sunni groups as they come under heavier extremist domination. More broadly, the intensification of sectarian identities in the region is entering Turkey’s politics. There are already mounting sectarian tensions between Sunni and Alevi populations, and Erdogan will work to shore up his nationalist/conservative base on the eve of elections, further deepening societal divisions.

Amid this setting, the risk from Erdogan’s increasingly polarizing populist rhetoric has worsened. Under pressure, he will be inclined to become aggressive, attacking foreign businesses and raising foreign conspiracy theories against the West and Israel.

The coming battle over the chairmanship of the ruling Justice and Development Party (AKP) in September will only intensify this trend, as Erdogan is likely to try to block President Abdullah Gul from taking on party leadership.

While Erdogan and the AKP are set to win the upcoming elections, intensifying fights within the party will be the real political story to watch, and the business and policy environment will become even more unpredictable.

Against a challenging economic backdrop of a large current account deficit, poor-quality financing, and the private sector’s large net foreign exchange position, Turkey will be particularly vulnerable to political and policy uncertainty this year.Read the full story here.