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Turkey Country Risk Report Q4 2016

  • September 2016
  • -
  • Business Monitor International
  • -
  • 53 pages

Core Views

Turkish President Recep Tayyip Erdogan will tighten his grip on power in the near term, following the failed coup on July 15-16. However, this will raise long-term political risks in the country, and further strain relations with the West. Turkey will operate under a de-facto executive presidential system under Erdogan, with negative implications for institutional quality and government checks and balances. Turkey faces a challenging foreign policy environment amid heightened regional tensions and rising domestic security risks as the government attempts to cement its role as an economic and political power in the region. A collapse of the government's ceasefire with the Kurdish separatist PKK is a major step back for the country, weighing on growth potential. Relative to the past decade, we expect slower, more balanced growth in the next decade on the back of less abundant foreign capital inflows and slower domestic credit growth. 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. Despite cheaper oil, Turkey's current account deficit will remain large and a major macroeconomic vulnerability. 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. Major Forecast Changes We have revised down our 2017 real GDP growth forecast from 3.3% to 3.0%.

Table Of Contents

Turkey Country Risk Report Q4 2016
Executive Summary.................................................................................................................................. 5
Core Views.......................................................................................................................................................................................5
Major Forecast Changes.................................................................................................................................................................5
Key Risks.........................................................................................................................................................................................5
Chapter 1: Economic Outlook.................................................................................................................. 7
SWOT Analysis........................................................................................................................................................... 7
BMI Economic Risk Index.......................................................................................................................................... 7
Economic Growth Outlook........................................................................................................................................ 8
Coup Aftermath Will Weigh On Growth.........................................................................................................................................8
The attempted coup in Turkey in July will reinforce several negative trends that have been undermining the business and investment
climate in recent years, while policies being pursued by the government will exacerbate the country's main structural macroeconomic
imbalances. With external headwinds also rising in light of slower EU growth, we remain below consensus in our real GDP growth
forecasts for both 2016 and 2017.
GDP By Expenditure Outlook.................................................................................................................................. 11
TABLE: GDP GROWTH FORECASTS....................................................................................................................................................................12
TABLE: PRIVATE CONSUMPTION FORECASTS..................................................................................................................................................12
TABLE: GOVERNMENT CONSUMPTION FORECASTS.......................................................................................................................................12
TABLE: FIXED INVESTMENT FORECASTS..........................................................................................................................................................12
TABLE: NET EXPORTS FORECASTS....................................................................................................................................................................12
Fiscal Policy And Public Debt Outlook.................................................................................................................. 13
Sovereign Risks Higher After Failed Coup.................................................................................................................................13
The failed coup attempt in Turkey will not result in any major changes to the government's conservative fiscal policy stance. That said,
given Turkey's structural macroeconomic imbalances and wide external deficit the government's ongoing push to boost growth via lower
interest rates poses more risks than traditional fiscal stimulus.
Structural Fiscal Position........................................................................................................................................ 14
TABLE: MAIN REVENUE and EXPENDITURE CATEGORIES..................................................................................................................................16
TABLE: FISCAL AND PUBLIC DEBT FORECASTS...............................................................................................................................................16
External Trade And Investment Outlook................................................................................................................ 17
Current Account Still The Achilles Heel......................................................................................................................................17
With the benefits of oil price declines running their course, Turkey's current account deficit will remain one of the largest among
emerging market peers. The failed-coup attempt in July will weigh on foreign direct investment, meaning the structure of deficit financing
will remain highly precarious given the reliance on 'hot money' inflows.
Outlook On External Position.................................................................................................................................. 19
TABLE: TOP FIVE GOODS EXPORTS and IMPORTS IN 2015.................................................................................................................................19
TABLE: CURRENT ACCOUNT BALANCE FORECASTS.......................................................................................................................................20
TABLE: CAPITAL and FINANCIAL ACCOUNT BALANCE.........................................................................................................................................20
Currency Forecast.................................................................................................................................................... 21
TRY: Monetary Easing Ensures Steady Depreciation...............................................................................................................21
Following a period of relative stability in 2016, the Turkish lira's trajectory will be characterised by continued depreciation and volatility
in the coming years. This will be driven by a variety of factors including loose monetary policy, elevated inflation and wide external
deficits.
TABLE: BMI CURRENCY FORECAST....................................................................................................................................................................22
Monetary Policy........................................................................................................................................................ 23
Policy Too Loose To Tackle Inflation..........................................................................................................................................23
The Central Bank of Turkey's monetary policy stance is too loose to tackle elevated inflation and inflation expectations. Ongoing easing
will further damage its inflation fighting credibility, leave the lira exposed to downside volatility, and raise doubts about the bank's
independence in Turkey's post-coup attempt political environment.
Monetary Policy Framework.................................................................................................................................... 24
TABLE: MONETARY POLICY FORECASTS..........................................................................................................................................................24
Chapter 2:10-Year Forecast.................................................................................................................... 27
The Turkish Economy To 2025............................................................................................................................... 27
Shine Coming Off Growth Story..................................................................................................................................................27
Turkey will remain on a volatile growth trajectory, with average real growth rates slowing to 3.1% in the next decade, from 5.0% in 2003-
2013. Although the size of the domestic market and strategic location will remain key selling points for foreign investors, weighing down
on potential growth will be high operational risks, weakening institutional quality, and persistent macroeconomic imbalances.
TABLE: LONG-TERM MACROECONOMIC FORECASTS.....................................................................................................................................27
Chapter 3: Political Outlook................................................................................................................... 31
SWOT Analysis......................................................................................................................................................... 31
BMI Political Risk Index........................................................................................................................................... 31
Domestic Politics..................................................................................................................................................... 32
Post-Coup Attempt Purge To Increase Long-Term Risks.........................................................................................................32
Turkish President Recep Tayyip Erdogan will tighten his grip on power in the near term, following the failed coup on July 15-16.
However, this will raise long-term political risks in the country, and further strain relations with the West.
TABLE: POLITICAL OVERVIEW.............................................................................................................................................................................32
Foreign Policy........................................................................................................................................................... 34
Geopolitical Rivalry To Limit Turkey-Russia Rapprochement..................................................................................................34
Although Turkey and Russia are moving towards rapprochement after a period of heightened tensions, the two countries will remain
geopolitical competitors as a result of overlapping spheres of influence. This means that tensions will re-emerge from time to
time.
Long-Term Political Outlook................................................................................................................................... 36
Rising Authoritarianism To Increase Risks To Stability............................................................................................................36
Turkey is likely to move in a more authoritarian direction over the next few years, as President Recep Tayyip Erdogan tightens his grip
on power following the failed military coup in July 2016. Meanwhile, Turkey will face rising security risks from Islamic State and Kurdish
separatist groups. In terms of foreign policy, we expect Turkey to drift further away from the West in favour of closer ties with its eastern
neighbours.
Chapter 4: Operational Risk................................................................................................................... 39
SWOT Analysis......................................................................................................................................................... 39
Operational Risk Index............................................................................................................................................ 39
Operational Risk....................................................................................................................................................... 40
TABLE: OPERATIONAL RISK.................................................................................................................................................................................40
Market Size And Utilities.......................................................................................................................................... 41
TABLE: EMERGING EUROPE - MARKET SIZE AND UTILITIES RISK ...............................................................................................................42
Labour Costs............................................................................................................................................................ 45
TABLE: LABOUR REGULATIONS GOVERNING FLEXIBILITY OF WORKFORCE............................................................................................... 46
Chapter 5: BMI Global Macro Outlook................................................................................................... 49
Global Macro Outlook.............................................................................................................................................. 49
EMs Past The Worst, But Structural Problems Persist.............................................................................................................49
TABLE: GLOBAL ASSUMPTIONS..........................................................................................................................................................................49
TABLE: DEVELOPED STATES - REAL GDP GROWTH, %..................................................................................................................................50
TABLE: EMERGING MARKETS - REAL GDP GROWTH, %.................................................................................................................................51
TABLE: MACROECONOMIC DATA and FORECASTS..............................................................................................................................................53

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