TURKEY : Playing dangerous games

With nearly 35 5 ,000 confirmed Covid-19 cases and 9, 5 00 deaths, Turkey stands as one of the most affected countries in the Middle East by the pandemic. New daily cases reached a 5,000 peak in April, new infections stabilized in June and July only to surge in August on the back of the lifting of containment measures. Having managed to exit from recession in 2019, the Turkish economy suffered tremendously from border closing s and the broad domestic lockdown imposed in March, that resulted in a 9.9% YoY GDP contraction in Q2-2020 (vs. +4.5% in Q1-2020), the collapse of domestic demand, the sudden stop of key sector tourism and the sharp drop in exports explaining most of t his figure . Despite all the fiscal and monetary measures put in place to shield the economy, the capacity of Turkey to navigate through this historic crisis has raise d wariness among international investors. The TRY has been under pressure, down 3 3 % against the USD since the beginning of the year, having touched a historical low of 7.9 84 ( on Oct.22 ). Forced to give credit to support the economy, Turkish banks are facing increasing risk of an explosion of Non-performing loans ($19bn) in 2021 now that more and more companies face difficulties in servicing foreign -currency deb t. While the world economies fight to recover and cushion the devastating Covid-19 pandemic impact, and as neighboring Europe struggles to contain the spread of a second wave, Turkish 2020 GDP is set for a 5% contraction followed by a +4% GDP growth in 2021. Yet, the Neo-Ottoman political agenda of President Recep Tayyip Erdogan remains well in place. Despite a challenging external and domestic economic environment, Turkey has continued to fuel regional geopolitical feuds at all fronts. The most recent one concerns mounting tensions with Greece and the European Union on Ankara’s intention to explore natural gas resources in Eastern Mediterranean disputed waters, and its inference concerning the Nagorno-Karabakh Armenian-Azerbaijani conflict. A long time European Union and NATO ally, Turkey seems de termined to continue running regional power games . A de-escalation of the Turkey-Greece/EU tensions seems currently unlikely , feeding concerns of a military conflict in the doors of Eur ope. A scenario that should not be underestimated , given the recent record of Turkish foreign military incursions. A degradation of the regional geopolitical scene will certainly dent investor’s confidence despite Ankara’s efforts to display silver linings on the Turkish recovery potential.