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Turkey Business Forecast Report Q3 2014

  • June 2014
  • -
  • Business Monitor International
  • -
  • 47 pages

Core Views

Although we have a positive outlook on Turkey's long-term growth, our real GDP growth forecasts reflect an expectation of below-potential growth in the years ahead. This will result from less abundant foreign capital inflows and slowing domestic credit growth, both key drivers of Turkey's economy. Political instability and social tensions will remain elevated in the run-up to general elections in 2015, weighing on business and consumer confidence. With relatively healthy budget and debt dynamics, the government will provide a more pronounced fiscal boost to the economy. However, recent populist policy initiatives lead us to question the government's commitment to conservative fiscal management. While the government's debt load is low by regional standards, the private sector's rampant external borrowing in previous years has
greatly increased macroeconomic risks.

After substantial widening of external imbalances in 2013, we expect Turkey's current account deficit to narrow only gradually in the coming years due to its dependence on imported energy. Turkey will remain reliant on short-term foreign capital inflows to cover the sizeable current account shortfall, leaving it prone to tightening global
liquidity and shifts in international risk sentiment. A dovish central bank will keep inflation well above target and ensure a volatile growth trajectory. A major corruption scandal and increased incidences of popular protest have highlighted the fact that major political challenges still face the country over the medium term. In particular, the ruling Justice and Development Party will take an increasingly unilateral approach as it struggles to maintain support, and will face growing and more vocal public opposition, with the potential for further unrest. Moreover, Turkey faces a challenging foreign policy environment amid heightened regional tensions, and as the government attempts
to cement its role as an economic and political power in the region.


Major Forecast Changes

We have revised up our 2014 real GDP forecasts for Turkey on the back of a strong Q114 growth reading. We now expect growth of 2.4% in 2014, from 1.5% previously.

Table Of Contents

Turkey Business Forecast Report Q3 2014
Executive Summary. 5
Core Views..5
Major Forecast Changes5
Key Risks To Outlook5
Chapter 1: Political Outlook. 7
SWOT Analysis.. 7
BMI Political Risk Ratings 7
Domestic Politics . 8
Erdo?an Presidency All But Assured...8
Turkish Prime Minister Recep Tayyip Erdo?an will win the presidency in the August election and continue to dictate the policy agenda
of the ruling Justice and Development Party. As such, we expect social tensions to remain elevated and caution that populist economic
policies could begin to damage Turkey's reputation for prudent fiscal management.
Table: Political overview..8
Long-Term Political Outlook.. 10
Structural Changes To Continue10
Turkey's moderate Islamist Justice and Development Party (AKP) will continue to press ahead with reforms to the country's political and
social system for the foreseeable future. Although the AKP continues to enjoy broad popular support, there is growing and increasingly
visible opposition from the traditional secular establishment that threatens to trigger a wider backlash. In terms of foreign policy, we
expect Turkey to continue rebalancing its interests away from the West in favour of closer ties with the former Soviet Union and the
Middle East and North Africa.
Chapter 2: Economic Outlook 13
SWOT Analysis 13
BMI Economic Risk Ratings... 13
Economic Activity... 14
Weak Consumption Outlook Underpins Low Growth Forecast14
We forecast real GDP growth in Turkey of 2.4% and 3.3% in 2014 and 2015 respectively, from 4.0% in 2013. Slowing capital inflows
and a tightening of domestic credit conditions has led to a slowdown in domestic demand, and we expect decelerating private
consumption to be the main driver of weaker growth, with net exports propping up total economic activity.
Table: GDP By Expenditure...14
Balance Of Payments.. 17
Pace Of Rebalancing To Slow Beyond 2014..17
Turkey's current account deficit will narrow to 6.0% in 2014, from 8.0% of GDP in 2013, on the back of weak imports and strengthening
external demand. Beyond 2014, the pace of rebalancing will slow substantially as domestic demand accelerates, with the deficit
remaining above 5.0% through 2018. Short-term investment inflows will continue to be the main source of deficit financing, implying that
Turkey will remain vulnerable to destabilising periods of capital flight.
Table: Current Account...17
Monetary Policy .. 19
Central Bank Policy Ensures Volatile Growth Trajectory..19
Abundant global liquidity will allow the Central Bank of Turkey to continue easing policy in H214. However, the bank will miss inflation
targets both this year and next, perpetuating perceptions of a pro-growth bias and government influence. This implies little support
from a policy perspective for Turkey's rebalancing process, ensuring a volatile growth trajectory and continued susceptibility to capital
flight.
Tab le: Monetar y Polic y19
Fiscal Policy 21
Fiscal Risks Growing...21
Turkey's public debt and deficit will remain at sustainable levels in the coming years even as the government plays a larger role in
driving economic growth. That said, recent populist policy initiatives threaten Turkey's reputation for prudent fiscal management.
Table: Fiscal Policy21
Exchange Rate Policy 23
Lira To Resume Depreciatory Trend..23
The lira's recent run of appreciation against the US dollar is running out of steam, in line with rising US yields and domestic monetary
easing. A wide current account deficit, sluggish external rebalancing and a fundamentally dovish central bank will keep the currency on
a depreciatory path over the next two years.
Table: Currency Forecast..24
Chapter 3: 10-Year Forecast... 25
The Turkish Economy To 2023.. 25
Convergence To Remain In Play.25
Although serious challenges face the Turkish economy over the next several years, we retain a positive view on the long-term
convergence prospects for Turkey, with real GDP growth expected to continue outperforming the eurozone through to the end of our
10-year forecast period. Key economic policy and institutional reforms in the medium term will be necessary to set the groundwork for
productivity gains beyond 2015. Significant risks will remain, however, especially as underlying social tensions between secularists and
moderate Islamists are unlikely to disappear in the next decade. This has contributed to our view that Turkey will not join the EU at any
point over our forecast period.
Tab le: Long -Term Macr oec onomic Forecasts 25
Chapter 4: Business Environment. 27
SWOT Analysis 27
BMI Business Environment Risk Ratings.. 27
Business Environment Outlook. 28
Institutions . 28
TABLE: BMI BUSINESS AND OPERATION RISK RATINGS28
TABLE: BMI LEGAL FRAMEWORK RATING.29
TABLE: LABOUR FORCE QUALITY..30
Infrastructure... 31
TABLE: EMERGING EUROPE - ANNUAL FDI INFLO WS.31
TABLE: TRADE AND INVESTMENT RATINGS.32
Market Orientation... 33
TABLE: TOP EXPORT DESTINATIONS ...33
Operational Risk.. 34
Chapter 5: Key Sectors.. 35
Defence and Security.. 35
Table: Defence Expenditure...36
Freight Transport 38
Tab le: Road Freight 39
Tab le: Rai l Freight ..39
Tab le: Air Freight 40
Tab le: Martime Freight ..40
Other Key Sectors... 43
Tab le: Oi l and Gas Sect or Key Indicat ors ..43
Tab le: Pharma Sect or Key Indicat ors 43
Tab le: Infrastructure Sect or Key Indicat ors ...43
Tab le: Telec oms Sect or Key Indicat ors 44
Tab le: Food and Drink Sect or Key Indicat ors ..44
Tab le: Aut os Sect or Key Indicat ors ...44
Chapter 6: BMI Global Assumptions. 45
Global Outlook. 45
Emerging Market Deceleration45
Tab le: Globa l Assumpti ons .45
Tab le: Deve loped States , Rea l GDP Growt H, %...46
Tab le: BMI VERSUS BLOO MBERG CONSENSUS REAL GDP GROWTH FORECASTS, %. 46
Tab le: Emerging Markets , Rea l GDP Growth , %..47

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