Country Report Turkey February 2009

Outlook for 2009-10

• The Economist Intelligence Unit expects the ruling Justice and Development Party (AKP) to remain in office beyond 2010. We expect that, with IMF support, the government will do enough to avoid a severe economic crisis.
• A solution to the division of Cyprus, a major obstacle to Turkish membership of the EU, is not expected before the end of 2010. Negotiations started in September 2008, but have made almost no progress.
• We expect that under a new IMF stand-by agreement, the government will adopt a degree of fiscal discipline, helping to keep the budget deficit at around 3% in 2009-10 and to stabilise the public debt/GDP ratio at about 40%.
• Given the deterioration in Turkey's growth outlook, concerns about liquidity and the likelihood of an IMF programme, we expect the Central Bank of Turkey to cut interest rates in 2009-10, but less rapidly than in recent months.
• We estimate GDP growth to have been 1.5% in 2008 as a result of a sharp contraction in the fourth quarter. The negative trend is expected to continue well into 2009, so that GDP will fall by 1.5% this year, then pick up in 2010.
• Weaker economic growth and lower international commodity prices will reduce the current-account deficit and ease external financing pressures.

Monthly review

• The Ergenekon investigation into an alleged ultranationalist gang comprising former generals and top civilians has widened. It has raised tensions within institutions as well as between the AKP and the secularist/nationalist elite.
• The government appeared to have strong public support for its condemnation of Israel’s land assault on Gaza in January 2009.
• On January 9th Egemen Bagis, a former foreign policy advisor to the prime minister, Recep Tayyip Erdogan, took over from the minister of foreign affairs, Ali Babacan, as Turkey’s EU negotiator.
• The Central Bank has accelerated interest rate cuts as inflation looks set to fall and aggregate demand has weakened sharply.
• The government and the IMF have stated that negotiations on a new stand-by loan have made progress. However, several issues remain unresolved.
• The budget deficit was YTL17.1bn (US$10.4bn) in 2008, which we estimate to have been 1.8% of GDP, compared with a deficit of 1.6% of GDP in 2007.
• The 2009 budget law, which was approved by parliament in December 2008, was predicated on an implausible GDP growth projection of 4%.
• Industrial output fell for the fourth month in November, by 13.9% year on year.

Source: Country Report

This report covers the following industry codes:
SIC Code: 49;60;53;59
NAICS Code: 22;52;44