Country Report Turkey July 2009

Outlook for 2009-10

• The Economist Intelligence Unit expects the ruling Justice and Development Party (AKP) to remain in office beyond 2010, despite tensions with the secularist/nationalist opposition and the military.
• 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 slow progress.
• Although differences between the IMF and the government remain unresolved, we expect a new stand-by accord to be put in place by the end of this year to support investor confidence and ensure greater fiscal discipline.
• We expect the Central Bank of Turkey to cut interest rates by a further 25 basis points in 2009, then adopt a "wait and see" policy during the remainder of the year and shift to a tightening bias in 2010.
• We expect GDP to fall by about 5.5% in 2009, before picking up moderately in 2010, but a sharper and more prolonged slump cannot be ruled out.
• Weaker economic growth and lower international commodity prices will reduce the current-account deficit and ease external financing pressures.

Monthly review

• Tensions between the government and the military intensified in June, when a liberal left-leaning newspaper, Taraf, published a story alleging the discovery of a military plan to undermine the government.
• In May the government announced that it would seek to have parliament approve an EU harmonisation package before the summer recess on July 1st, but it will not be debated until after parliament reconvenes on October 1st.
• In June the government extended most of the temporary reductions in value-added tax (VAT) and special consumption tax (SCT) rates introduced in March/April and announced further measures to tackle the economic crisis.
• The public finances have continued to give cause for concern as the budget deficit rose to TL20.7bn (US$13bn) in the first five months of 2009, compared with a deficit of TL2.1bn in the same period of 2008.
• The Central Bank reduced its policy rates by a further 50 basis points on June? 16th, bringing the overnight borrowing rate down to 8.75%.
• GDP contracted by 13.8% year on year in the first quarter of 2009. Data available for the second quarter suggest that the pace of decline moderated slightly in April-June.
• In May the year-on-year rate of consumer price inflation fell to 5.24%??