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Turkey’s sustainability performance has steadily declined in recent years. This has had a direct impact on the positioning of Robeco Emerging Debt.
President Erdogan has threatened to end the migration pact with the EU in response to the recent non-binding vote in the European parliament urging governments to freeze EU accession talks with Ankara. This latest episode underscores the sharp deterioration in relations between the EU and Turkey, especially after the failed coup attempt in July. More generally, it is a reflection of a wider malaise affecting Turkey’s country sustainability performance, which has suffered a steady decline in recent years.
As of October 2016, Turkey belongs to the bottom 10 performers in the RobecoSAM Country Sustainability Ranking, with an overall ESG score of 3.81 and a rank of 55. This represents a decrease of 0.65 in their ESG score and a slide of 11 ranks from September 2013. Considering the most recent political developments – not yet reflected in most data – there is currently no indication of a turn for the better but rather the risk of further erosion of Turkey’s sustainability profile.
For our Emerging Debt strategy a country’s ESG profile is valuable input. Changes in the Country Sustainability Ranking often reveal interesting trends in the way a country is run and in the underlying social tensions. Over a longer horizon we are convinced that ESG factors play an important role in determining financial returns and we have embedded these factors in the investment process of the Emerging Debt strategy. In the case of Turkey this information has helped us decide to hedge part of the investments in the lira prior to the currency’s significant depreciation.
Turkey’s governance performance and institutional framework have clearly been affected by disruptive politics and Erdogan’s tightening power grip. Instability and unrest have been exacerbated by a myriad of factors including: an increasingly authoritarian policy course, the massive inflow of Syrian refugees, terrorist attacks, Islamic State threats and the alleged end of the peace process with the Kurdistan Workers’ Party (PKK). These developments have also led to a deep divide between the pro- and anti-government groups that is manifest in all spheres of economic, political and social life—a chasm which is on course to widen with time.
The after-effects of the failed coup in July are aggravating the already delicate political situation. President Erdogan has responded to the failed coup by intensifying his long-running purges of police, military, education, business as well as political sympathizers (like the Gülen movement), leaving practically no segment of public or private sphere untouched. The crackdown will further weaken the country’s institutions and is already visible.
The EU 2016 Progress Report published on November 9, noted that there has been a relapse in important areas such as fundamental civil rights, democracy, press freedom and rule of law. The AKP (Justice and Development Party) has also renewed its push for a presidential system that would involve a transfer from executive powers to the president. Moreover, Erdogan has confirmed he will ask parliament to consider reintroducing the death penalty as punishment for the plotters behind the failed coup—a step that would be virtually tantamount to ceding the country’s EU membership ambitions.
The clampdown of the country’s institutions is all the more tragic given that the solidity of the governance framework is a key driver of business performance, economic success and social cohesion. Turkey already lags behind all OECD countries in terms of perceived quality and performance of governance and will now fall further behind its peers. True, some progress has been made in the social area, such as a reduction in absolute poverty and improvements in education. However, average household disposable income per capita is still slightly below 50% of the OECD average, working conditions are below OECD standards and income inequality remains high compared with OECD peers.
Gender disparities are pronounced with low female representation in parliament and large gender pay gaps. Turkey’s record on environmental, energy and urbanization issues also compares rather poorly with other OECD countries. Air and water quality are far below OECD averages, and greenhouse gas emissions per capita – while still fairly low – are rising rapidly. Competition for water across sectors will grow further as a result of ongoing urbanization and the increased irrigation needed for agricultural expansion. However, positive trends are also visible. Public awareness of environmental and climate change issues appears to be rising and public expenditures in some of these areas have been increasing in recent years. Moreover, Turkey is more or less in line with EU environmental legislation. But, as is the case with many other emerging economies, enforcement is a major weakness as environmental protection is still widely perceived as an obstacle to economic development.
The decline in the Turkish ESG profile has changed our attitude towards investing in the country. The recent deterioration in the ESG score is not a one-off event but fits in a negative trend. For other countries which experienced a similar decline in the past (e.g. Brazil) this served as a valuable warning signal.
In addition to its weakening ESG profile, the country suffers from ongoing weakness in the current account, stubbornly high inflation and has increased difficulties in attracting foreign direct investment. In our opinion the change in the risk profile of the country has not been fully reflected in the valuation of the currency against peers. We reduced investments in the Turkish lira in September. From the start of September until the end of November the Turkish lira has been the worst performing currency in the index, depreciating 14% versus the US dollar.