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Turkey Business Forecast Report Q4 2014

  • September 2014
  • -
  • Business Monitor International
  • -
  • 46 pages

Core Views
Although we view Turkey's long-term growth outlook positively, our real GDP growth forecasts reflect an expectation for below-potential growth in the years ahead. This is a result of 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, further 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 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 incidence 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 and institutional opposition, with the potential for further unrest. Moreover, Turkey faces a challenging foreign policy environment amidst heightened regional tensions as the government attempts to cement its role as an economic and political power in the region.

Table Of Contents

Turkey Business Forecast Report Q4 2014
Executive Summary. 5
Core Views..5
Key Risks To Outlook5
Chapter 1: Political Outlook. 7
SWOT Analysis.. 7
BMI Political Risk Ratings 7
Domestic Politics . 8
New PM Won't Challenge Erdogan's Authority...8
The appointment of Foreign Minister Ahmet Davutoglu to replace Prime Minister Recep Tayyip Erdogan after the latter's transition to
the presidency on August 28 confirms our belief that the centre of power in Turkish politics will shift to the presidential office. Although
Erdogan will remain the main driver of the government's policy agenda, Davutoglu will face challenges in maintaining party unity and
popular support while addressing Turkey's foreign policy threats.
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, its consolidation of power will
elicit strong opposition from the traditional secular establishment which 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
Slower, More Balanced Growth Ahead..14
After a slowdown in 2014, Turkish real GDP growth will re-accelerate in 2015 and 2016, expanding by 3.4% and 3.8% respectively. The
lofty average growth rates achieved in the previous decade will be unattainable as external rebalancing necessitates much slower credit
and private consumption growth, but a greater contribution from government spending and net exports will help to sustain relatively
robust rates of economic expansion.
Table: GDP By Expenditure...14
Balance Of Payments . 17
Rebalancing Running Its Course17
Turkey's impressive pace of current account rebalancing in H114 will not be sustainable in the coming quarters as external demand
softens and domestic demand begins to recover. We forecast the current account deficit to fall to 6.0% and 5.7% of GDP in 2014 and
2015 respectively, but to stay above 5.0% over the next five years and remain a systemic risk to macroeconomic stability. 17
Table: Current Account...17
Monetary Policy .. 19
Monetary Policy Still Too Dovish19
The recent pause in the Central Bank of Turkey (CBRT)'s rate cutting cycle is not an indication of a more hawkish trajectory. Inflation
targets remain well out of reach, while political pressure to stimulate growth will continue to damage the bank's credibility and weigh on
investor sentiment towards lira-denominated assets. Recent rate cuts will spur credit growth, slowing the pace of external rebalancing
and increasing the risk of capital flight.
Tab le: Monetar y Polic y19
Fiscal Policy 20
Larger Deficits Ahead, But Fiscal Stability Intact..20
Turkey will run larger fiscal deficits in the years ahead as the government takes a more active role in supporting growth, but public debt
ratios will remain stable and we do not expect a significant deterioration in the country's sovereign credit profile.
Table: Fiscal Policy21
Exchange Rate Forecast. 22
TRY: Macro Fundamentals, Policy Risks Prevent FX Strength22
More aggressive European Central Bank easing will support demand for the lira, but overly dovish domestic monetary policy will
prevent appreciation and keep the currency on a depreciatory trend against the US dollar amid elevated geopolitical risk, wide inflation
differentials and smaller financial account surpluses relative to previous years.
Table: Currency Forecast..22
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 ground work 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 anytime
over our forecast horizon.
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
Pharmaceuticals and Healthcare... 35
Tab le: Pharmaceutica l Sales , Hist orica l Data And Forecasts 36
Tab le: Hea lthcare Expenditure Trends , Hist orica l Data And Forecasts 37
Tab le: Government Hea lthcare Expenditure Trends , Hist orica l Data And Forecasts . 37
Tab le: Private Hea lthcare Expenditure Trends , Hist orica l Data And Forecasts ... 37
Tab le: Telec oms Sect or - Mobi le - Hist orica l Data and Forecasts 40
Tab le: Telec oms Sect or - Wire line - Hist orica l Data and Forecasts 41
Other Key Sectors... 43
tab le: Oi l and Gas Sect or Key Indicat ors ..43
tab le: Defence and Securit y Sect or Key Indicat ors .43
TABLE: Infrastructure Sect or Key Indicat ors ...43
TABLE: Food and Drink Sect or Key Indicat ors ..44
TABLE: Aut os Sect or Key Indicat ors ...44
tab le: Freight Key Indicat ors 44
Chapter 6: BMI Global Assumptions. 45
Global Outlook. 45
Eurozone Downgrade On Poor Q214..45
Tab le: Globa l Assumpti ons .45
Tab le: Deve loped States , Rea l GDP Growt H, %...46
Tab le: BMI VERSUS BLO MBERG CONSENSUS REAL GDP GROWTH FORECASTS, %. 46
Tab le: Emerging Markets , Rea l GDP Growth , %..47

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