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Turkey Business Forecast Report Q1 2015

  • December 2014
  • -
  • Business Monitor International
  • -
  • 52 pages

Core Views

Although we hold a positive view on Turkey's long-term growth, we expect slower, more balanced growth in the next decade relative to the previous one. This will result from less abundant foreign capital inflows and slower domestic credit growth. Political uncertainty and social tensions will rise in the run up to general elections in 2015, further weighing on business and consumer confidence.
The government maintains a conservative fiscal policy with healthy budget and debt dynamics. However, recent populist policy initiatives lead us to question the government's long-term commitment to conservative fiscal management. Lower commodity prices, in particular that of oil, has bolstered Turkey's short-term outlook. Lower imported energy costs will support household purchasing power and help reduce the current account deficit.
Nevertheless, we expect Turkey's current account deficit to narrow gradually in coming years, as its net hydrocarbon deficit will remain very large. 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 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 and rising external security risks as the government attempts to cement its role as an economic and political power in the region.
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.

Major Forecast Changes

We have revised our current account deficit forecasts, and now expect a shortfall of 5.0% and 4.8% of GDP in 2015 and 2016 respectively, from 5.7% and 5.6% previously.
We have revised our general government budget forecasts, and now expect a deficit of 2.1% and 1.9% of GDP in 2015 and 2016 respectively, from 2.6% and 2.5% previously.

Table Of Contents

Turkey Business Forecast Report Q1 2015
Executive Summary 5
Core Views 5
Major Forecast Changes 5
Key Risks To Outlook 5
Chapter 1: Political Outlook 7
SWOT Analysis 7
BMI Political Risk Index 7
Domestic Politics 8
Rising Security Risks In All Directions 8
Turkey will largely exclude itself from the fight against the Islamic State, as it sees greater dangers from joining the US coalition than
from taking a passive stance. This will jeopardise the government's peace talks with Kurdish PKK separatists and exacerbate domestic
social tensions. Furthermore, Turkey faces rising security risks from all directions, and will find itself increasingly isolated from old and
new allies.
Table: Political overview 8
Long-Term Political Outlook 11
Structural Changes To Continue 11
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 former Soviet Union states, the
Middle East and North Africa.
Chapter 2: Economic Outlook 15
SWOT Analysis 15
BMI Economic Risk Index 15
Economic Activity 16
Outlook Improving, But Slower Trend Growth Still Lies Ahead 16
Abundant global liquidity and falling oil prices have bolstered Turkey's short-term economic outlook, but a transition to slower, more
balanced growth relative to the past decade will continue as the country's external rebalancing process has much further to run. We
forecast real GDP growth of 3.5% and 3.8% in 2015 and 2016 respectively.
Table: GDP By Expenditure 16
Exchange Rate Policy 19
TRY: Short-Term Gains Won't Last 19
The Turkish lira will outperform other emerging market currencies in the coming months on account of improving terms of trade and
strong speculative capital inflows, but over the medium term the currency will remain on a depreciatory path owing to high relative
inflation, US dollar strength, and a dovish central bank.
Table: Currency Forecast 19
Balance Of Payments 20
Oil Not A Game Changer For External Dynamics 20
Lower oil prices will support Turkey's external rebalancing process. We now forecast a current account deficit of 5.0% and 4.8% of
GDP in 2015 and 2016 respectively, from 5.7% and 5.6% previously. However, the deficit will still be one of the largest among major
emerging markets and the composition of external financing will remain precariously skewed towards volatile, short-term inflows.
Table: Current Account 21
Monetary Policy 23
Monetary Easing Ahead 23
The Central Bank of Turkey (CBRT) will cut its main policy rate by 50 basis points in H115, to 7.75%, amidst low global yields and
declining headline inflation, but US rate hikes and lira depreciation will rule out further easing in the remainder of the year. Even so,
monetary policy will be too loose to meet the bank's inflation targets or mitigate the risk of capital flight should global risk appetite
Table: Monetary Policy 23
Business Monitor International Ltd www.businessmonitor.com 3
Fical Policy 25
Healthy Fiscal Dynamics To Continue 25
Healthy fiscal dynamics and a relatively robust sovereign profile will remain strong suits of the Turkish economy. Nevertheless, we
forecast the budget deficit to average 1.9% of GDP from 2015-2017, which is wider than the previous years and above the government's
own projections.
Table: Fiscal Policy 25
Chapter 3: 10-Year Forecast 27
The Turkish Economy To 2023 27
Convergence To Remain In Play 27
Although serious challenges face the Turkish economy over the next several years, we retain a positive view on its long-term
convergence prospects, with real GDP growth expected to continue outperforming the eurozone and many emerging European peers
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, eliminating a key policy anchor.
Table: Long-Term Macroeconomic Forecasts 27
Chapter 4: Operational Risk 29
SWOT Analysis 29
Operational Risk Index 29
Operational Risk 30
Table : Operational Risk 30
Transport Network 31
Table : Emerging Europe Transport Network Risks 32
Economic Openness 35
Table: Emerging Europe - Economic Openness 36
Table : Top 5 Imported Products (USDmn unles otherwise stated ), 2007-2013 37
Table : Top 5 Trade Partners and Product Exports (USDmn unles otherwise stated ), 2007-2013 38
Chapter 5: Key Sectors 41
Infrastructure 41
Table : Infrastructure and Construction Industr y Data (2012-2017) 42
Table : Infrastructure and Construction Industr y Data (2018-2023) 43
Table : Oil Production (2012-2017) 47
Table : Oil Production (2018-2023) 47
Table : Gas Production (2012-2017) 48
Table : Gas Production (2018-2023) 48
Other Key Sectors 49
Table : Pharma Sector Key Indicators 49
Table : Telecoms Sector Key Indicators 49
Table : Defence and Securit y Sector Key Indicators 49
Table : Food and Drink Sector Key Indicators 50
Table : Autos Sector Key Indicators 50
Table : Freight Key Indicators 50
Chapter 6: BMI Global Assumptions 51
Global Outlook 51
Warning Signs Growing 51
Table: Global Assumptions 51
Table : Developed States , Real GDP Growt H, % 52
Table : Emerging Markets , Real GDP Growth , % 53

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