Turkey's Deepening Political and Judicial Crackdown on the Opposition: Assessing the Geopolitical and Economic Risks to Foreign Investors in Emerging Markets Amid Democratic Backsliding

In early 2025, Turkey's political landscape reached a boiling point. The arrest of Istanbul Mayor Ekrem İmamoğlu, a leading opposition figure and potential presidential challenger, on politically motivated charges of corruption and ties to the PKK, ignited mass protests and a broader crackdown on dissent. This escalation, part of a pattern of democratic backsliding under President Recep Tayyip Erdoğan, has sent shockwaves through global markets and redefined risk assessments for emerging market (EM) investors. The implications extend far beyond Turkey's borders, as similar trends in countries like Hungary, Poland, and Tunisia highlight a growing crisis of governance in EMs.

Political and Judicial Repression: A Systemic Threat to Stability

Turkey's judiciary, long criticized for its lack of independence, has become a tool of political repression. Over 100 opposition figures, journalists, and activists were detained in the weeks following İmamoğlu's arrest, with charges ranging from “insulting state institutions” to “inciting hatred.” The government's use of retroactive legal provisions and the revocation of academic credentials for critics further eroded trust in the rule of law. These actions mirror strategies seen in other EMs, such as Hungary's Fidesz party consolidating power through judicial reforms and Poland's dismantling of judicial independence under the PiS party.

The erosion of democratic norms is not merely a political issue—it is an economic one. When institutions lose credibility, markets follow suit. Turkey's Central Bank of the Republic of Turkey (CBRT) raised interest rates to 46% in a desperate bid to stabilize the lira, but the currency depreciated to 42.5 TRY/USD by April 2025, a 16% drop in three days. The BIST 100 stock index, a barometer of Istanbul's equities, fell 15% in a single week, its worst performance since 2008. These numbers reflect a loss of confidence not just in Turkey's economy, but in its political system's ability to govern.

Geopolitical Spillovers and Investor Reassessment

Turkey's crisis has become a cautionary tale for EM investors. The lira's collapse has spilled over into other EM currencies, with the MSCI Emerging Markets Currency Index down 5% year-to-date. Sovereign debt spreads in politically fragile markets like Pakistan and Egypt have widened, as investors reassess their exposure to countries where governance risks outweigh economic fundamentals.

This trend is not unique to Turkey. In Tunisia, where President Kais Saied has consolidated power through rigged elections and mass arrests, bond yields have surged to 15%, and foreign direct investment (FDI) has contracted by 30% since 2024. Similarly, in Hungary, Fidesz's authoritarian turn has led to a 20% decline in FDI since 2022, as companies flee a regulatory environment increasingly hostile to foreign capital. These cases underscore a broader pattern: democratic backsliding is now a primary risk factor for EM investments.

Investor Strategies in a Shifting Landscape

For investors, the key to navigating this environment lies in proactive risk mitigation. Here are four strategies to consider:

1. Reduce Exposure to Turkish Assets:
   Unhedged Turkish equities and lira-denominated bonds are particularly vulnerable. ETFs like the iShares MSCI Turkey ETF (TUR) have underperformed, and short positions in Turkish assets or inverse ETFs like EMTN (ProShares Short Emerging Markets) can hedge against further losses.

2. Hedge Currency Volatility:
   FX derivatives and inverse currency ETFs like YCLN (CurrencyShares Turkish Lira ETF) can protect against the lira's depreciation. Investors should also monitor the CBRT's policy credibility, as any failure to stabilize inflation could trigger further devaluation.

3. Diversify into Stable EM Markets:
   Shift capital to EM economies with stronger governance, such as Vietnam, Indonesia, and parts of Southeast Asia. ESG-compliant funds are also gaining traction, as they avoid investments tied to authoritarian regimes.

4. Monitor Political Developments:
   The CBRT's ability to regain control of inflation and restore market confidence will be critical. If the central bank fails, Turkey's debt crisis could deepen, leading to a broader EM sell-off.

The Broader Implications for Emerging Markets

Turkey's crisis is a microcosm of a larger trend: the intersection of political instability and financial markets. As authoritarianism spreads in EMs, investors must prioritize governance resilience over short-term yields. The OECD's 2024 report on corruption in Turkey's construction sector and the lack of credible enforcement of anticorruption laws further highlight the need for due diligence.

In conclusion, Turkey's political and judicial crackdown is a wake-up call for EM investors. The erosion of democratic norms is no longer a distant risk—it is a present and growing threat to capital returns. By adopting a disciplined approach to risk assessment and diversification, investors can navigate this volatile landscape while safeguarding their portfolios against the next wave of geopolitical turbulence.