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Turkey Country Risk Report Q2 2016

  • March 2016
  • -
  • Business Monitor International
  • -
  • 47 pages

Core Views 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. 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. With the Justice and Development Party (AKP) regaining its parliamentary majority in the November 2015 general election, Turkey will operate under a de facto executive presidential system, with negative implications for institutional quality and government checks and balances.

A collapse of the government's ceasefire with the Kurdish separatist PKK is a major step back for the country, weighing on growth potential. 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.

Table Of Contents

Turkey Country Risk Report Q2 2016
Executive Summary 5
Core Views5
Key Risks5
Chapter 1: Economic Outlook 7
SWOT Analysis 7
BMI Economic Risk Index 7
Economic Growth Outlook 8
Multiple Headwinds Weighing On Growth8
Geopolitical risks, weak external demand, lira depreciation and private sector deleveraging will weigh on Turkey's growth potential in the
coming quarters We forecast below-consensus real GDP growth of 29% and 32% in 2016 and 2017 respectively
GDP By Expenditure Outlook 10
TABLE: GDP GROWTH FORECASTS10
TABLE: PRIVATE CONSUMPTION FORECASTS10
TABLE: GOVERNMENT CONSUMPTION FORECASTS10
TABLE: FIXED INVESTMENT FORECASTS11
TABLE: NET EXPORTS FORECASTS11
Monetary Policy 12
Inflation Fighting Credibility Waning Further12
The Central Bank of Turkey will maintain its dovish stance in the face of ongoing government pressure to support growth, keeping
inflation well above target levels both this year and next
Monetary Policy Framework 13
External Trade And Investment Outlook 15
Despite Improvement, Current Account Still Major Risk15
Turkey's current account rebalancing will run its course in 2016 as oil prices bottom, with the deficit remaining one of the largest among
major emerging economies at just under 50% of GDP
Outlook On External Position 16
TABLE: TOP 5 GOODS EXPORTS and IMPORTS IN 201516
TABLE: CAPITAL and FINANCIAL ACCOUNT BALANCE16
Fiscal And Debt Outlook 18
Spending Pledges To Drive Deficit, Yields Higher18
Higher spending commitments following the 2015 general election, and overly optimistic official growth forecasts will see Turkey's
budget deficit widen to 21% and 20% of GDP in 2016 and 2017 respectively
Structural Fiscal Position 19
TABLE: MAIN REVENUE and EXPENDITURE CATEGORIES19
Currency Forecast 22
TRY: More Depreciation Ahead Amid Loose Monetary Policy, Political Risks22
While we expect broad-based US dollar strength to taper out in 2016, the Turkish lira will remain on a depreciatory path in the coming
year due to loose monetary policy, elevated political risks and still-wide external deficits
TABLE: BMI CURRENCY FORECAST 22
Chapter 2: 10-Year Forecast 25
The Turkish Economy To 2025 25
Shine Coming Off Growth Story25
Turkey will remain on a volatile growth trajectory, with average real growth rates slowing to 32% in the next decade, from 50% in 2003-
2013 Although the size of the domestic market and its 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 FORECASTS25
Chapter 3: Political Outlook 29
SWOT Analysis 29
BMI Political Risk Index 29
Domestic Politics 30
Domestic And Foreign Policy Risks Rapidly Rising30
Russia's intervention in Syria has dealt a devastating blow to Turkey's foreign policy goals and raised the risk of a military confrontation
between the two states On the domestic front, violence between the Turkish government and the PKK shows no signs of abating
and we see growing risks of fresh elections as President Recep Tayyip Erdogan seeks to bolster his party's majority and pursue
constitutional reforms to strengthen the power of the executive office
TABLE: POLITICAL OVERVIEW30
Scenario: Turkey-Russia Clash In Syria And Beyond32
The possibility of a major military clash between Turkey and Russia in Syria is increasing, as both countries bolster their proxy forces
The Bosphorous and Dardanelles also constitute potential flashpoints, if Turkey were to block Russian shipping through the Straits
Direct confrontation between Ankara and Moscow would raise the prospect of NATO intervention, substantially elevating the dangers of
the Syrian conflict
Long-Term Political Outlook 34
Structural Changes To Continue34
Turkey's moderate Islamist Justice and Development Party will continue to press ahead with divisive reforms to the country's political
and social system for the foreseeable future, and risks creating an increasingly and unsustainably polarised society In terms of foreign
policy, we expect Turkey to continue rebalancing its interests away from the West
Chapter 4: Operational Risk 37
SWOT Analysis 37
Operational Risk Index 37
Operational Risk 38
TABLE: OPERATIONAL RISK38
Trade Procedures And Governance 39
TABLE: EMERGING EUROPE - TRADE PROCEDURES AND GOVERNANCE RISK 39
TABLE: EXPORT AND IMPORT DOCUMENTS40
TABLE: TRADE PROCEDURES BREAKDOWN40
Vulnerability To Crime 40
Chapter 5: BMI Global Macro Outlook 43
Global Macro Outlook 43
Tail Risks Mounting Amid Sub-Par Growth43
TABLE: GLOBAL ASSUMPTIONS43
TABLE: DEVELOPED STATES, REAL GDP GROWTH, %44
TABLE: BMI VERSUS BLOOMBERG CONSENSUS REAL GDP GROWTH FORECASTS, 2015 AND 2016 (%) 44
TABLE: EMERGING MARKETS, REAL GDP GROWTH, %45
TABLE: MACROECONOMIC DATA and FORECASTS47

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