These schemes can take multiple shapes — some in the form of state reinsurance guarantees, and others relaxing eligibility requirements — but their overall effect has been similar: increased economic stability in conjunction with existing trade credit insurance. The European Commission, for example, expanded the eligibility of short-term export credit coverage by removing all countries from its list of marketable risk countries.
All state reinsurance guarantee schemes (which cover domestic as well as export receivables) have now been extended to June 30, 2021. Although the EU’s Temporary Framework for State Aid Measures now expires at the end of 2021, any extension to individual schemes beyond June 30 for EU countries would require approval by the national government responsible as well as the European Commission. Most schemes are not expected to be extended, but elections in Germany in September 2021 and in France in April 2022 may strongly influence decisions to extend relief.
Some observers have raised concerns that the pandemic stimulus and state-backed schemes are allowing “zombie companies” to keep operating. Zombie companies are unprofitable businesses with heavy debt burdens, usually low cash reserves, and an inability to invest or grow. Even before the pandemic, Europe and North America had numerous zombie companies, and their volume is likely to explode amid the impact of COVID-19. The number of bankruptcies plummeted during the global recession in 2020, a signal that pandemic relief may be propping up weak businesses. Extending loans and other support to keep zombie companies alive could prolong economic weakness and ultimately result in mass insolvencies.
In any event, governments’ temporary trade credit support will eventually end. This will require investors and exporters to find longer-term solutions for credit risks. It’s advisable to begin exploring those options sooner rather than nearer the end of state-backed schemes.
2020 was a challenging year for Turkey, amid mounting opposition pressure from the government’s mishandling of the pandemic, rising costs of living, high unemployment, plummeting household incomes, and a downward trend in the value of the Turkish lira, which lost about 30% of its value against the US dollar. The government managed to remain in power after appointing a new cabinet with pro-market reformists. However, market consensus predicts it will be a short-lived relief, as the administration’s core constituent base are the main cost bearers of tighter fiscal policies.
Driven by the fallout from COVID-19, analysts expect a series of interest rate cuts in 2021 to ease monetary policy, increasing the likelihood of an economic crisis. However, on this occasion, world leaders are unlikely to come to Turkey’s aid. Due to the growing scope of disenchantment in the Turkish population, the government may double down on nationalist rhetoric and foreign policy to placate them. The EU's position may become inflexible, primarily driven by the French president and his goal to enlist more member states to get tough with Turkey by pursuing sanctions, thereby raising the scope of diplomatic rupture. This could provoke Ankara to again open the gateway into Europe for refugees, as well as further agitation in the Mediterranean Sea, risking direct conflict.
2020 saw Turkey and Israel draft a maritime deal. Through delimitation of Turkey and Israel’s maritime areas, while encroaching Cypriot waters, the border will represent a shared economic area connecting the coasts of Israel and Turkey. The Turkish maritime area will increase by 10,000 square kilometers, inclusive of the potential to access hydrocarbons. The agreement also sees Israel pivot its natural gas exports away from Cyprus, instead joining the preexisting Turkish pipelines. This will require infrastructure investment, despite the fiscal pressures brought by the pandemic.
Turkish-Israeli relations can potentially reach new strategic heights, though this presents an issue for Israel. Cyprus remains a close ally and is part of maritime agreements in line with international law. The current maritime border is internationally recognized, so annulling preexisting agreements to align with Turkey would increase political risk for Israel due to the diplomatic fallout. Likely condemnation from Greece and Cyprus, which would see their sovereignty encroached, could require the EU to engage on the issue.
Turkey’s political risk ratings remain high in many areas of physical and economic security. Skeptical investors believe Turkey faces many deep political and economic issues that the government’s new appointments and more market-friendly language will not solve, because it will continue to hold a tight grip on decision-making. Turkey needs international goodwill to reinvigorate its growth and will remain largely dependent on Western financing, despite Ankara's best efforts to find alternative funding sources.