Country Report Turkey

Outlook for 2008-09

• The Economist Intelligence Unit expects the Constitutional Court to close the Justice and Development Party (AKP) and ban many of its leading members, including the prime minister, Recep Tayyip Erdogan.
• If this happens, we expect the party to re-form under a new name and remain in government. Most of the banned MPs will be able stand as independents in by-elections or possibly a general election in late 2008 or early 2009.
• We expect that Turkey's EU accession bid and economic reform will remain the government's main priorities, but progress will be slow.
• Tensions with the military may hinder the government's ability to engage fully in efforts to resolve the division of Cyprus.
• The government has not signed another IMF stand-by accord. However, post-programme monitoring and possibly a precautionary stand-by agreement later in the year should help to maintain investor confidence.
• Owing to the continued rise in inflation, we expect the Central Bank of Turkey to raise interest rates by 50-100 basis points in the next two to four months, keep them on hold during the rest of 2008 and lower them gradually in 2009.
• High inflation, interest rate increases and weaker external demand will limit GDP growth to around 3% in 2008, compared with 4.5% in 2007. Growth is forecast to accelerate gradually to about 4% in 2009.

Monthly review

• The AKP's strategy has moved away from trying to pass constitutional amendments that would make it difficult to close down political parties. It now seems to be preparing for the party to be closed later this year.
• The government's medium-term fiscal framework has set fiscal targets for 2009-12: a primary surplus on the consolidated government sector of 3% of GDP in 2009, 2.7% in 2010, 2.5% in 2011 and 2.4% in 2012.
• The Central Bank raised its overnight borrowing rate by 50 basis points to 15.75% in mid-May. On June 3rd the Bank raised its end-of-year inflation targets to 7.5% in 2009 and 6.5% in 2010, both 4% previously, and 5.5% in 2011.
• Industrial output rose by 2.4% year on year in March, down from 11.4% in January and 7.5% in February.
• Consumer price inflation rose to 10.7% in May, from 9.7% in April. Producer prices rose by 16.5% year on year, up from 14.6% in the previous month.
• The trade deficit and the current-account deficit continued to widen in US dollar terms in the first quarter of 2008.

SOURCE: Country Report