Multinational executives are facing a period of heightened instability in Turkey as the country’s involvement in the Syrian conflict increases, the domestic struggle between the Turkish government and the armed wing of Turkey’s pro-Kurdish movement PKK resurfaces, and the question of whether Turkey will have an early election or a coalition government remains unanswered.
Companies should review their downside scenarios for Turkey now and assess any additional planning that needs to take place to prepare the business for increased political risk in the coming months. FSG estimates that the likelihood of heightened domestic instability substantially disrupting multinational corporations’ performance in 2015 and 2016 has increased from 25 percent to 35 percent as a result of recent events, necessitating a careful review by companies with a presence in Turkey of the risks to which their business is exposed. This applies to both 2015 plans as well as to plans under development for 2016.
What executives need to know:
- The Justice and Development Party (AKP) and the main opposition Republican People’s Party (CHP) are continuing their coalition talks and have until the last week of August to form a government. If they can’t, Turkey will be holding early elections latest by end of November.
- The Turkish government is engaged in a dual campaign against both ISIS and PKK cells within its borders.
- The ceasefire between the PKK and the Turkish government has de facto ended, meaning the PKK has already, and could continue, to increase its terrorist attacks against Turkish government and security officials.
- The government has and will continue to increase security measures at the southeastern border.
- Turkish military presence as well as drones and surveillance balloons will be increased.
- Intermittent walls of around 100 kilometers will be built along the 911-kilometer border with Syria.
- Turkey will play an increased role in the coalition campaign (formed of 60 countries including U.S., Western and regional powers) against ISIS in Syria.
- Its main military base Incirlik, in the southern city of Adana will be open to coalition forces in their operations against ISIS.
- Although details and timelines have not been confirmed, Turkey is likely to establish pockets of safe zones inside Syria, which will be dedicated to various efforts including hosting Syrian refugees.
What are the implications?
- Government spending plans for the rest of 2015 as well as the 2016 budget will allocate more resources to security institutions such as the police, military and the national intelligence service.
- Consumer confidence, already around a six-year low of 64.66 in July, will remain muted for a longer period of time, potentially into 2016.
- Hesitant local and international businesses will maintain their cautious stance towards new investments and likely further postpone expansion plans to H2 2016, depressing growth and demand for B2B goods and services.
- The Turkish lira has already depreciated slightly and will continue to depreciate if early elections are announced, insecurity perceptions regarding Turkey increase, and when the U.S. Federal reserve increases interest rates.
- Making the case to corporate for increased resources to Turkey will become harder due to a rise in insecurity concerns. However, increased focus on sales and market will be necessary to capture fluctuating demand in the country.
What should executives do?
- Review their scenarios for the market. The likelihood for a downside scenario for 2015 and 2016 where the Turkish government mismanages domestic and regional instability, politicizes economic decision-making and postpones structural reform has increased from 25 percent to 35 percent. Companies that do not have basic plans for a downside scenario involving substantial political volatility and security threats should build one now in partnership with their local teams and distributors. Executives must monitor the following signposts to anticipate stability in Turkey:
- Prepare for both currency depreciation and volatility for the rest of 2015. Companies, including the financially conservative ones should consider hedging, invoicing in Turkish lira, or working with fixed currencies. Multinationals should also consider how they would need to adjust pricing in the context of muted demand in the coming months combined with high inflation. We expect consumers in particular to become more price sensitive in an environment of high political and economic uncertainty.
- Engage with local partners and distributors and determine your new plan for the next six to eight months. Ensure they are engaged in aggressive sales efforts, making necessary marketing and branding investments, working on new campaigns, or even considering temporary promotions to capture muted demand.
To learn more about FSG’s scenarios for Turkey, clients can review our reports on the short-term outlook here and the long-term possibilities in the market here. For additional support on building custom contingency plans for the market, clients should contact their client relationship director; or email us at email@example.com.