‘Blue Gold’ Will Be Turkey’s Key To The ‘Dry Crescent’

Next year will mark a full century since the Ottoman Empire lost control of the areas now known as Syria and Iraq. Now Turkey is pursuing an increasingly nationalistic and assertive foreign policy that’s being called ‘Neo-Ottomanism’. Ironically, water is the geopolitical asset that gives Turkey influence over the area historically referred to as the Fertile Crescent.

The Tigris and Euphrates rise in the Anti-Taurus mountains of Eastern Turkey, giving Turkey effective control of the water resources of Syria and Iraq. In an age of growing population and climate change, water is truly becoming ‘blue gold’.

Contentious dam construction

Turkish dam construction has long been contentious.  Since 1975, Turkish dams have cut the volume of water reaching Iraq by 80% and Syria by 40%. Conflict has almost spilled over on many occasions. In 1990, conflict brewed when both Syria and Iraq believed that Turkey had deliberately cut off their water supplies as both noted a simultaneous, serious decline in water flow. The situation was only diverted by Iraq’s invasion of Kuwait. NATO has a conflict scenario in which Iraq and Syria simultaneously attack Turkey, while the UN ‘Uppsala Model’ includes a scenario in which Iraq and Turkey are brought to the brink of war over water.

Political instability, foreign interference and the Kurdish independence movement in Syria and Iraq present challenges and opportunities which are likely to drive Turkey to weaponize water to extend its political influence. In the summer of 2014, Erdoğan ordered the water in the Euphrates to be held back, reducing water levels in Lake Assad, which supplied IS-held Raqqa. The disappearance of credible opposition in Iraq and Syria with the appearance of IS has given Erdogan greater freedom to extend control of water through the South-Eastern Anatolia dam project (GAP).  While GAP’s main purpose is hydroelectric power and economic growth, Turkey is aware of its geopolitical value. TheIlisu hydro-dam, the latest of the 22 planned dams in GAP, will straddle the Tigris just 30 miles north of the Syrian border. The water from these rivers is not just vital for Iraq and Syria’s food and water, it is also important for their economies. Prior to the rise of ISIS, Iraq’s oil industry required 1.8 billion cubic metres of water to function. Once GAP is completed, it is estimated that half the water from the Tigris and Euphrates may never leave Turkey.

Weaponising water

Turkey’s control of water resources can be instrumentalised to thwart or hinder Kurdish independence.  Iraq Kurdistan relies on 6 major rivers for over 75% of its water, three of which originate in Turkey, and the other two which flow from Iran; also hostile to a Kurdish state.  If Turkey were to limit water supplies to Iraqi Kurdistan, it would hamstring the Kurdish oil industry, central to Kurdish politico-economic autonomy.  It would also generate food and water shortages.  The water dynamics in the region provide a new perspective on the hardline attitude Turkey has taken towards domestic Kurds.  Eastern Turkey holds many of Turkey’s 15 million Kurds, but controlling the region’s watershed is crucial to maintain Turkish territorial integrity and generate influence in the region.

In the future, Turkey’s control of water will become an increasingly potent lever.  Population growth, climate change, and poor management are making water a scarce resource.  According to the UN, by 2050, Iraq’s, Syria’s, and Turkey’s populations are expected to grow by 130%, 89%, and 22% respectively.  A conservative estimate is that over the coming years climate change will reduce rainfall by 20% and massively increase evaporation, halving the amount of water available per person in the Middle East.  Of course, the effects of climate change will be greater in some places; predicted weather patterns could result in the desertification of over half of Syria.  Unsustainable water management, particularly digging illegal wells in Syria, have also decreased groundwater resources in the region, adding unnecessary strain.

A need for sustainable management

The growing centrality of water and the political fragility of Iraq and Syria have given Turkey the agency to expand its influence in the region.  It is certainly exploiting this opportunity. Yet, this combination of factors also means Turkey’s influence is likely to sustain if peace returns. This could generate political friction and spark further economic and political instability, something the region certainly does not need. A lasting political resolution to the instability in Iraq and Syria should incorporate sustainable management of the region’s water economy.


Ben Abbs is an Analyst at Global Risk Insights. As originally appears at: https://globalriskinsights.com/2017/12/turkey-water-influence/


This column does not necessarily reflect the opinion of the editorial board or Frontera and its owners.

The Turkish Lira Continues To Slide, Are Bonds Next?

The Turkish lira is languishing at near record lows as December dawns.

The currency, which touched its lowest ever levels against the US dollar on November 23, found itself close to that level as November ended and December began — and its slide may not be over yet.

Further weakness in the lira will impact local currency-denominated bonds unless steps are taken to counter its decline.

How can the sliding lira impact Turkish bonds?

Between local currency-denominated equities and bonds, currency movement generally has a bigger impact on the latter since the absolute returns are usually smaller.

A weakening local unit will lower returns from a bond denominated in that currency when converted to the comparable foreign unit. Hence, since the Turkish lira has been declining against the greenback, returns from Turkish bonds denominated in the lira will fall when converted into dollars. Conversely, Turkish bonds denominated in dollars would see their returns rise.

This can be expected to be the case going forward, given market expectations of a further weakening in the lira.

But there is a caveat.

Central bank action

Turkey has been wrestling with elevated levels on inflation; it has been in double digits for most of 2017 so far. As shown by the graph below, after falling into single digits in July, prices began to rise again and for October, they stood at their highest level in nine years.

If the Central Bank of Turkey were to raise its key rates at this juncture, it would not only help in controlling price rise, it will also support the sliding lira.

But will the central bank take this action, and why has it not done so already?

The answer lies with the now even more empowered presidency.

In late November, President Recep Tayyip Erdoğan had said that the “artificial inflation” in exchange rates would revert to normal soon.

During the event, he also reiterated his belief that higher interest rates actually caused inflation rather than restraining it.

Apart from his belief, another reason why the President wants interest rates to remain low is to enable cheap credit via which he intends to fuel economic growth as well as maintain his popularity with people.

Hands tied

This stance by an exceptionally powerful political establishment has prevented the central bank from undertaking an aggressive rate action. Its one-week repo, overnight lending and late liquidity window rates continue to remain at 8%, 9.25% and 12.25% respectively. The last major change in the one week repo rate was effected in November 2016.

The central bank has taken some other steps and indirect measures to curtail inflation and support the lira though.

From November 6, it decreased the amount of foreign currency that lenders are required to park with the regulator. This unshackled $1.4 billion of foreign exchange for banks. It also allowed exporters to repay up to $5 billion in forex loans not due until February in lira at promising rates.

Recently, the central bank disallowed lenders from using its aforementioned 9.25% interbank overnight rate facility, thus forcing them towards the 12.25% late liquidity window. This was intended to lift the bowering costs for banks, thus tightening the monetary stance a bit, albeit indirectly.

But given the multi-year high levels of inflation, these measures may not suffice to contain price rise and may also prove to be insufficient to provide a floor to the lira. This also means continued lower returns from bonds.

Though an aggressive stance by the central bank is warranted, its possibility remains low. However, some rate action in its upcoming meeting would be required to boost sentiment towards the Turkish lira failing, in which case a further decline in both the currency and returns on local bonds can be expected.

“Arabamız”: The Numbers That Drove Turkey’s Launch of a Homegrown Automobile Manufacturer

“Our car” is what the Turkish word ‘Arabamız’ translates to in English. The country, which is the 14th largest automobile manufacturer in the world, recently announced its first indigenous car whose prototype is expected by 2019 with commercial production targeted by 2021.

Five companies will collaborate to bring the national pride project to fruition. Three of them – Anadolu Group, BMC, and Kıraça Holdings – are directly involved in manufacturing cars for foreign brands including Kia and Isuzu. Among the other two, Turkcell is the nation’s largest mobile operator while Zorlu Holding is a conglomerate and will primarily provide technical support and assistance.

An experienced campaigner

Though Turkey may seem late to the game of car manufacturing, it is an experienced campaigner in the arena as it currently exports cars to Europe, Middle East, and Central Asia. 77% of the production of its automotive industry was exported in 2016 with Germany, France, and the United Kingdom among the top export destinations.

The graph above shows auto production in the country is segregated across the commercial vehicle and passenger car segments, and points to the increasing interest of its export partners in choosing the country as a key overseas manufacturing hub.

Apart from manufacturing, Turkey is also home to research and development centers of global auto majors including Ford, Daimler, and Fiat.

Domestic demand

Development of an indigenous car also makes sense from the perspective of domestic consumption. Monthly sales figures over the past 10 years, as shown by the graph below, show a generally increasing trend.

Electric and hybrid car sales are also posting impressive numbers, with sales up 800% in the first nine months of 2017 to 2,763 compared to 300 in first nine months of 2016. Meanwhile, the yearly sales breakdown shows rising demand for passengers.

The country imports about 70% of its vehicles, thus indicating a massive domestic demand which can be served with homegrown production. Further, fulfillment of some portion of this demand would also help in reducing imports as well as currency outflow.

The car, which has not yet been named, is not the first attempt by Turkey in domestic car production though. In the 1960s, the country had created its first locally made car christened “Devrim” which translates to “revolution.”

However, the car was riddled with issues concerning fuel consumption and many other. In the end, the project never came to fruition. This is the first concrete attempt at making a domestic car again since then.

With the focus now on hybrid and electric cars, it is possible that this new car may herald the auto revolution in Turkey that was originally envisioned six decades ago.

The Irony of Being a Profitable Commercial Bank in Turkey

Corporate profits are a key input for analysts and investment managers when zeroing in on buying and selling positions in equities. While using the bottom-up approach, it is quite possible that a company posting healthy profits finds a place in investment portfolios even if the country of its domicile is struggling with its macroeconomic fundamentals.

Turkey’s banks have been quite profitable this year, but that, according to the government, is not a good thing.

Profitability is bad?

The government has been trying to push economic growth and has been desirous of low interest rates in order to spur consumer spending.

The graph above shows the rise in household loans by deposit money banks. Data for 2017 is as of end-June – the latest monthly data made available by the central bank.

However, the government is not happy with the country’s deposit money banks; it wants them to lend out more, especially in light of the tremendous profit growth they have witnessed in recent times.

In a speech to the Chamber of Commerce and Industry in Trabzon on August 8, President Recep Tayyip Erdoğan alluded to bank profitability as a problem. Al-Monitor quoted him saying, “Last year, after all the distress we went through, banks had a profit growth of 40%, which means there is a problem here. … Moreover, banks have almost doubled their profits this year. This is a disaster.”

He further stated “Banks are not behaving themselves. We keep saying that interest rates must come down, but banks are using the citizens’ deposits almost as a means of fleecing them.”

These strong words have come at a time when the government’s policies themselves were responsible for boosting bank profits in the first place. The encouragement to lend more, apart from reducing reserve requirements, has led to increased business for banks, which, in turn, has resulted in sizable profit growth.

A second helping

A day after the President came down heavily on banks for not reducing rates on credit, Economy Minister Nihat Zeybekci, in a meeting with businesses, was quoted as saying, “Our discourse on interest rates is quite clear. In order for Turkey to see further economic growth, to produce more, to create new jobs and to raise exports, financing must be abundant, cheap and easily accessible.”

He added that, “We have seen that Turkish lenders are profitable enough that they have room to make sacrifices in their profit margins…they should gain from the rising demand rather than the rising interest rates.”

Banks find themselves in a difficult spot: while profits are good, especially for investors, they were incidental to government policies. And now, they’re being chastised by the government for not doing enough for the economy.

This issue becomes even more crucial considering that a free flow of loans starts becoming risky for banks by raising the possibility of bad loans.

Apart from the issue of bad loans, there is a risk that Turkey may be slowing down going forward. Let’s look at this aspect in the next article.

How Monstrous Consumer Credit Growth Is Impacting Banks and Turkish Bonds

Turkey’s economy has bounced back from a contraction in Q3 2016 to grow at 5% in Q1 2017. It is expected to have grown even quicker in the second quarter. A rise in credit has been primarily responsible for the bounce-back.

According to Al-Monitor, Turkish banks’ profits reached 25 billion liras ($7 billion) in the first half of 2017. This was equal to their entire aggregate profits in 2016.

As we have seen in the previous article of this series, the rise in bank profits was fuelled by government policies and encouragement to lend. One of the measures adopted for it was providing treasury-backed loans via the Credit Guarantee Fund (CGF).

Defending banks

The CGF has issued loans amounting to 207 billion liras ($59 billion) to 313,000 customers according to Huseyin Aydin, the president of the Turkish Banks Union. The legal limit of the CGF is 250 billion lira.

According to an article written by Mustafa Sonmez and published by Al-Monitor, Aydin has expressed that “We used the legal limits to the full. We put all the money we had into loans, to the last penny,” referring to the effort by banks to support government policies.

On the criticism by President Recep Tayyip Erdoğan regarding banks’ profits, he said, “Judging by the profits at the Istanbul stock exchange, in the industry or other companies, the profits of the banking system are at a reasonable level.”

Impact on bonds

The lending spree that the banks have been on has certainly supported the real sector. However, schemes like the CGF which are guaranteed by the government, and loan growth in particular, has put the banks at risk.

The graph above shows the rise in non-performing loans. The government has pledged to absorb 7% of possible defaults on the new loans made under the CGF, thus negatively impacting credit quality. Though banks have continued lending, they’re not sure about the use it is being put to.

Further, it has put pressure on government finances, which is reflecting in government bonds.

The graph above shows that since early June, yield on the 10-year government bond has risen by 50 basis points.

Given that the CGF is nearing its legal limit and some tax incentives are close to ending, further pressure can be expected on Turkish bonds if the legal limits of the facility are not increased or the government does not announce more measures.

A somber view on the economic future of the country in general and on credit quality of loans and overall bank profitability could put upward pressure on yields.

The CGF could also have an impact on equities apart from Turkish bonds. Let’s assess this in the next article.

After A Surge, Will Turkey Fall Flat After Government’s Support Measures Expire?

Macro-economically speaking, Turkey was in bad shape last year, with economic growth contracting, as shown by the graph below, and inflation also on the rise.

Meanwhile, the worsening of public finances had led to the country losing its investment-grade credit rating in 2016.

In order to resuscitate the economy, the government looked to get consumer spending back on track, which led to their encouragement to give out cheap loans. In order to do so, it had introduced tax breaks, like the temporary removal of the 6.7% consumption tax.

Further, even in face of rising inflation, as shown by the graph below, the government wanted the central bank to keep interest rates low so that cheap credit would remain available.

Whenever the central bank had raised rates in the past, it had drawn the ire of the government, particularly President Recep Tayyip Erdoğan, who has publicly expressed his dislike for rate hikes due to their negative impact on economic growth.

Economic growth surge

The push for cheaper credit has had some positive effect on the economy, as shown by gross domestic product growth shooting up in Q1 2017.

In a recent report, J.P. Morgan raised its estimate on Turkey’s economic growth for 2017 from 3.8% to 4.6%, primarily on the back of an even quicker pace of growth in Q2 as compared to the first quarter.

The firm highlighted a sharp bounce back in tourism, rising exports to Europe, the relative stability in the lira, and government decisions to effect tax cuts and the credit guarantee mechanism, as the main reasons for the surge in economic activity.

However, there may be several reasons which may slow down the strong comeback.

Slowing down?

J.P. Morgan noted that one of the reasons for the expected slowdown in the economy is that some of the government’s support measures will expire in the second half of the year.

The firm outlined that tax cuts applicable to white goods and furniture – a measure to increase household spending – will end in September. Further, corporations will begin paying social security premiums which were deferred in the first quarter.

Will this slowdown negatively impact Turkish bonds and equities? Let’s look at Turkish bonds in the next article to get a better picture.

Is Istanbul’s Booming Stock Market On Last Leg After $71 Billion Credit Fund Nearly Depleted?

The iShares MSCI Turkey ETF (TUR) was up 39.5% YTD 2017 until August 16. As the graph below shows, it has far outperformed the iShares MSCI Emerging Markets ETF (EEM).

The TUR witnessed a surge after mid-April, when President Recep Tayyip Erdoğan won the referendum to concentrate powers in the presidency.

Strong credit growth has boosted economic growth as well as stock markets. Reuters reported that according to an official from the Turkish Banks Association, loans are expected to rise by 16-18% this year.

Another reason for the strong performance of Istanbul’s stock market was the Credit Guarantee Fund (CGF). The CGF boosted profit expectations, thus leading to a rise in stocks.

In March, the government increased the size of the Credit Guarantee Fund by more than ten-fold to 250 billion Turkish liras ($71 billion).

Can the rally continue?

With a surge in loans increasing bank profits, financials have emerged as the biggest positive contributor to the TUR so far this year, accounting for 40% of the returns of the fund. Industrials are a distant second, followed by materials and consumer staples.

But with most of the CGF having already been used, and with some tax breaks also coming to an end, will Turkish equities witness a correction?

Given the fact that the macroeconomic picture of Turkey has brightened based on cheap credit, a paucity in further growth of loans would certainly be a dampener for stocks.

One of the ways to keep the rally going is to effect a rate cut. But given that inflation still remains high, and the central bank already hiked rates in January in order to contain inflation, this option may not be immediately at disposal.

A further increase in the limit of the Credit Guarantee Fund may provide the most immediate solution.

Cemil Ertem, who is an economic advisor to the President, had recently written in Milliyet newspaper that the facility will “deepen and continue.” Any announcement on that front, though, has not come forth yet.

As far as US investors are concerned, they seem to not have much interest in Turkish equities. In YTD 2017, the US-listed TUR witnessed net outflows worth $40 million.

As shown by the graph above, after an initial surge in net inflows at the beginning of the year, which, by mid-February had risen to $67 million, the fund has witnessed only outflows, except for one instance in June.

Given the slight uncertainty at this juncture and the elevated levels of returns, investors may need to wait before considering the further addition of Turkish equities to their portfolio.

How Stocks From Emerging Europe Were the Silent Thunder of H1 2017

Amidst the spotlight that Emerging Asia has cornered for its equity performance in 2017, there is a segment of the market whose thunderous performance has seen a muted response: Emerging Europe.

Analyzing charts plotting returns for regional indices provided in the first article of this series, you’d likely disagree though. The MSCI Emerging Markets Europe Index has been anything but impressive.

However, that’s primarily because of Russia. As the graph above shows, Russian equities form half of the EM Europe Index and its country index is down by over 15% in H1 2017. The other markets, specifically Poland, Turkey, and Greece have done phenomenally well in the period.

As can be seen from the graph below, even after their phenomenal returns, except for the index for Korea, no other Asian Index is close to matching the performance of the aforementioned Emerging Europe countries.

Financials have led sectors

Whereas the tech sector was the primary driver in the strong performance of Emerging Asia, financials played this role for Emerging Europe. We have looked at the following  country focused funds for this assessment:

  • iShares MSCI Poland Capped ETF (EPOL)
  • VanEck Vectors Poland ETF (PLND)
  • iShares MSCI Turkey ETF (TUR)
  • Global X MSCI Greece ETF (GREK)

The financial sector has been by far the largest contributor to all these funds in the year so far. Except for GREK, stocks from the financial sector form 40% or more of all other aforementioned funds. The GREK, whose portfolio is quite evenly distributed between financials, energy, and consumer discretionary sectors, has had help from all three which have also emerged as the top three sectoral contributors, though not in that order.

Missing in action?

Even after a superlative performance this year, US investors seem to be missing in action when it comes to investing in Emerging Europe equities. For instance, the combined flow to the two US-listed ETFs investing in Polish equities has been less than $70 million. The sole ETF investing in Greek stocks has seen net inflows of $69 million while the only ETF providing exposure to Turkish equities has seen as net outflow of $27 million in YTD 2017.

Compare this with the investment in Asian ETFs as seen in previous article, and one can see the general lack of interest in emerging markets from Europe.

Certainly, the reason that Emerging Asia always take precedence over its counterparts in Europe is because it houses the largest and fastest growing economies and alluring markets in the world. However, this analysis exemplifies that a broader focus can provide an edge to a portfolio.

And the flows to Emerging Europe indicate that many investors missed an opportunity to give their equity portfolios that edge in H1 2017.

An Inverted Yield Curve Has Not Stopped These Emerging Markets Equities From Powering Ahead

The sovereign bond yield curve in several emerging market countries has been inverted. This means that the yield on shorter maturity notes is higher than on longer-maturity notes and bonds. In a benign economic environment, a yield curve typically slopes upwards as yields rise with an increase in maturity.

An inverted yield curve is widely considered to be a signal for recession. In the US, this occurrence has been an accurate predictor of the previous two recessions. The graph above shows US Treasuries yield curves several months before recession hit the economy in 2000 and 2006.

While a central bank influences the short-end of the yield curve via its key interest rate, inflation generally determines the long-end of the curve. If the central bank is on a rate hiking spree – a sign of an economy getting stronger and risking a spike in inflation – then the move pushes yields on short-maturity papers.

However, if market participants have lower inflation expectations than the central bank does, yields on longer-term papers decline as investors move to shorter-duration papers. This leads to an inverted yield curve and is also considered a cautionary tale for equity investors.

The graph above shows the yield curves of Mexico, India, and China as of June 28. The curves of the first two are plotted with the left or primary Y-axis while that of China is with reference to the right or secondary Y-axis. At different points, there are tenures which have lower yields than their previous ones.

Turkey also finds itself in a similar situation.

Strong stock market performance

The graph above shows the returns of the MSCI indices corresponding to these countries through June 28. For countries experiencing inverted yield curves, these are exceptional returns. An exception here is Russia, whose equities have been hammered along side an inverted yield curve with the MSCI Russia Index down by 15.1% through June 28.

In the next article, let’s look at what could be causing this and how this could impact emerging markets going forward.

The Highest Risk Countries Held In Dollar Denominated Emerging Markets Bond Funds

The iShares J.P. Morgan USD Emerging Markets Bond ETF (EMB) is by far the largest ETF investing in the emerging markets bond asset class with close to $13 billion in assets under management. The PowerShares Emerging Markets Sovereign Debt Portfolio (PCY) is a distant second with $4.7 billion in assets.

Due to its sheer size, we’ll take a closer look at the EMB including its holdings and the state of the markets it is most heavily invested in.

The graph above shows the geographic composition of the fund. It is important to note that sovereign bonds dominate the fund, forming 81% of the portfolio. Further, the fund invests in dollar-denominated emerging markets bond issuances. Hence, the financial state of the nations the fund is invested in, and the movement of the dollar are crucial for the fund.

Most indebted nations among EMB holdings

The graph below displays those nations whose bonds form 3% or higher of the fund’s total portfolio. Among these 15 nations, Ukraine, Hungary, and Brazil, in that order, are the most indebted nations. These countries, whose average debt equates to three-fourths of their gross domestic product (GDP), form a combined one-tenth of the fund’s portfolio.

Of these three, Brazil maintains the highest weight at 3.8% and is arguably the most at risk given its fragile economic state and volatile political climate. Ukraine follows, given its tensions with Russia.

A commonality Ukraine and Hungary is that all holdings in the fund at present are government bonds. On the other hand, a number of holdings from Brazil are issued by Banco Nacional de Desenvolvimento Economico e Social (BNDES). The institution was one of 19 companies whose rating outlook was downgraded by Moody’s on May 31.

Biggest geographic holdings

Among the top five portfolio countries, Turkey and Russia could be considered the riskiest considering ongoing geopolitical developments which have taken a toll on these two markets.

For Turkey, it’s the controversial referendum which strengthen President Recep Tayyip Erdoğan’s grip on power in the country. Meanwhile, the latest US sanctions on Russia given the latter’s alleged involvement in the 2016 US Presidential elections, and its role in Syria and Ukraine have hurt investor sentiment towards the country.

As outlined earlier, the other aspect which is crucial to EMB’s performance is dollar movement. In the next article, we’ll look at how it impacts the ETF and how local currency emerging markets ETFs have performed in comparison.

These Three Countries Have the Most Complex Tax and Accounting Framework in EMEA

The Europe, Middle East, & Africa (EMEA) region has ample representation in the Financial Complexity Index for 2017, with 50 of 94 total countries from within the geographic area.

After viewing these top ten countries in the previous article, we’ll look in depth at the top three systems from the region. In order to add another dimension to the analysis, we have also looked at the country’s overall and parameter specific performance in the World Bank’s Doing Business report.


We’ve already looked at some of the issues in the previous article which make Turkey’s tax and accounting system the most complex in the world.

In terms of doing business, the country ranks the worst among the four nations from EMEA which make the top 10 list in the Financial Complexity Index. While ‘paying taxes’ and ‘resolving insolvency’ are parameters in which the country ranks the lowest, standing 128th and 126th among 190 countries, ‘protecting minority investors’ and ‘enforcing contracts’ are its best aspects where it ranks 22nd and 33rd in the world.

As far as efforts towards making the country’s system easier are concerned, Turkey is trying to “harmonise Turkish processes with those of the rest of the European Union, by minimising the differences in regulation, and equalising tax rates,” the report observed.


Alike Turkey, we have looked at the major issues making Italy’s tax and accounting system complex in the previous article.

The country is already making efforts to align its accounting practices with international standards. The report noted that the Italian Accounting Principles are more in line with IAS/IFRS, tax refund times have reduced, and the country has introduced tax bonuses. Further, the country is providing more flexibility to international companies in the area of taxation.

In terms of doing business, Italy is ranked 50th overall. However, it is the best in the world on the ‘trading across borders’ parameter. If taxation systems – a challenge – were to improve, the country will gain favor in the eyes of businesses, and possibly investors.


Greece ranks third in EMEA and fourth in the world in terms of its challenging tax and accounting system. The report observed that the country “has an extremely complex set of tax rules that directly impact local accounting.”

The value-added tax (VAT) is multi-layered and is inconsistent in its application. Further, the administrative process is long and cumbersome.

Given the economic condition the country is in, the report is unsure about the direction of accounting and tax-related developments.

In terms of accounting, and as a place of doing business, the situation for the country remains challenging.

The 3 Countries With The Most Complex Tax Systems In the World

It can be quite taxing doing business in certain countries. The Netherlands-headquartered TMF Group recently released its Financial Complexity Index for 2017 with the object of studying the complexity of accounting and tax systems. We’ve looked at the methodology and summary findings of the report in the previous article of this series.

The table below shows the top ten most complex jurisdictions when it comes to accounting and tax compliance. TMF Group had shortlisted 94 countries for the study, 50 of which were from the Europe, Middle East, & Africa (EMEA) region, 24 were from the Americas, and 20 were from Asia-Pacific (APAC).

Let’s look closely at the top three most complex jurisdictions in the world.


The report observed that Turkey is “a highly tax-driven country which requires a considerable level of local understanding and knowledge in order to maintain compliance.”

Some of the factors which make accounting and tax compliance exceptionally difficult in the country are that accounting still must be mandatorily carried out in hardcopy. If electronic ledgers are being used, the accounting software being used therein has to be approved by the government.

All foreign currency transactions have to be reported in the Turkish lira and the description of journals has to be in Turkish.

Further, the tax code in the country undergoes changes quite frequently, and the changes are not easily traceable.


Brazil has the most complex tax and accounting system in the Americas and the second most complex among the 94 jurisdiction chosen for the 2017 Financial Complexity Index report.

The TMF Group noted that the primary reason behind this is the 1988 Constitution which allows all three levels of government – federal, state, and municipal – to collect taxes. This has led to multiple tax rates and regulations, thus resulting in a multifaceted tax system which has over 90 taxes in its ambit.


Another country from EMEA, Italy, ranks third in the world in terms of the complexity of its accounting and tax system.

The report noted that though the country has made efforts to reduce taxation and align its accounting practices with international standards, “some very specific requirements” make its system one of the most complex in the world.

These requirements include maintaining accounts in Italian, mandating bookkeeping of all kinds to be in euros, and mandatory electronic invoicing in some cases. A multi-level tax system also makes the practice a monumental task.

After this brief overview, let’s look at the three most desirable jurisdictions of each region in detail, starting with EMEA.