Turkey’s new government, led by President Recep Tayyip Erdogan’s close ally Binali Yildirim, won a vote of confidence in parliament on May 29. Yildirim government’s top priority will be to push for constitutional reforms that would give Erdogan more executive powers, risking further political noise and social polarisation. Yildirim has taken over the premiership from Ahmet Davutoglu who was abruptly forced out of office last month after losing a power struggle with Erdogan.

Speaking in parliament on Sunday, Yildirim vowed his government to be the government of all Turkish citizens. Analysts, however, suggest the government will only tighten the screws on opponents and continue a war with the Kurdistan Workers’ Party (PKK) in the country’s predominantly southeast. Just like Erdogan, Yildirim is not willing to return to the negotiating table with the Kurdish insurgents. Hundreds of civilians and security personnel have lost their lives in clashes since last summer when a two-year ceasefire between the state and the PKK collapsed. The military says it has killed nearly 5,000 PKK militants since July. There seems to be no end to the Kurdish conflict any time soon.

Yildirim comes to office at time when Turkey’s $720bn economy is facing strong headwinds. Inflation is declining but remains above the government’s target of 5%. The country's high current account deficit is shrinking, but not thanks to strong export performance but rather due to lower import bill, supported by favourable oil prices. In an environment where domestic demand remains the only option to support slowing growth, the government will probably need to resort to populism that may hurt fiscal balances. In an effort to boost investments and consumer spending, the government will increase pressure on the central bank to cut its rates but this will only raise more questions about the independence of the monetary authority at a time when the US FED is probably preparing for a rate hike this summer. Investors are expecting reforms that should liberalise the labour market and boost domestic savings, but the problem is that market-friendly Deputy PM Mehmet Simsek does not have the leverage in the cabinet to push for the structural reforms.

On the foreign relations front, the most pressing issue for Yildirim's government is the migrant deal with the EU, which is now at an impasse for some time over the visa-free concession. The EU says Turkey must change its anti-terror laws to win visa-free travel to the Schengen area. But, Erdogan rejects this demand, even threatening to abandon the agreement. Yildirim is not likely to give the EU what it wants. Ankara and Brussels will continue discussions but the outcome is uncertain.

Relations with Russia will not improve in the near future as Erdogan refuses to apologise for the downing of a Russian bomber near the Syrian border last year. But, the cost of rising tension with Moscow is dear: Turkish food exporters are losing money and the tourism industry is suffering. Turkey and Russia support different factions in the Syrian conflict and a truce between the countries looks less likely until the civil war in Syria comes to an end.