Turkey Commercial Banking Report Q3 2007

The favourable economic environment is discussed at length later in this report. Real GDP growth continues to impress, and we believe that Brazil's improving macroeconomic environment will be supportive of higher rates of economic activity, going forward. As such, we have upwardly revised our year-end growth projections from 4.2% to 4.7%.

The Brazilian economy continued to expand in Q107, marking its 20th quarter of uninterrupted economic growth. Such a period of sustained economic expansion had not been seen beforehand (at least since the early 1990s, the earliest date for which we have data), and may point towards new era for Brazilian economic performance, in our view. Not only has Brazil embarked on a long period of economic activity, but it too has reduced its exposure to external shocks, while dramatically improving its macroeconomic fundamentals. Given the combination of price stability, responsible fiscal management, strong external demand, and a growing consumer appetite, we believe that the economy is heading towards a longer-term growth trajectory, reaching real GDP growth of 4.0-5.0% over the forecast period. This bullish view is reflected in our economic risk ratings, in which Brazil scores 66.9 (out of a possible 100) in our long-term category and 72.9 in our short-term category. These economic developments have not gone unnoticed by rating agencies. Recently, Standard and Poor's and Fitch Ratings revised the outlook on Brazil's sovereign credit rating of BB+, which is one notch below investment grade to positive. Similarly, financial markets have responded well, with equity markets trading in new, higher territory and bond yields continuing to decline.

According to Brazil's statistical agency, IBGE, real GDP growth came in at 4.3% year-on-year (y-o-y) in Q107. While this out-turn was slightly below market consensus estimates of 4.8%, we still believe it was a good showing, particularly as it did not come from a low base (growth in Q106 came in at 4.1% y-o-y). According to revised data, Q107's out-turn was slightly down from the 4.8% y-o-y recorded in Q406, though the four-quarter moving average came in at 3.8% y-o-y, its best reading since Q205. Various sectors of the economy posted strong out-turns, which is encouraging in our view. Services led the way, registering growth of 4.6% y-o-y in Q107, its best performance since Q404. This expansion was driven by robust performance in financial services (9.2%), communications (7.3%) and commercial-related activities (6.0%). Following suit was the mining sector, and industrial services, expanding by 4.1% and 3.9% y-o-y respectively, in Q107. Although these readings were slightly lower than the 5.6% and 3.9% yo-

y registered in Q406, they still show healthy expansions. Surprising on the downside, however, was manufacturing, industry, and construction-related activities registering 2.8%, 2.9% and 2.4% y-o-y respectively. That said, we expect these sectors to pick up over the next few months, as the economy continues to expand. Indeed, in light of the sustained economic expansion we have upwardly revised our year-end growth forecast from 4.2% to 4.7%.