Country Report Turkey June 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 maintain investor confidence.
• 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 re-emerged between the IMF and the government in May, we expect a new IMF stand-by accord to be put in place in the coming months to support investor confidence and ensure greater fiscal discipline.
• Given the weakness of the economy, concerns about liquidity, diminishing inflationary pressures and our forecast that an IMF deal will be signed, we expect the Central Bank of Turkey to cut interest rates further in 2009.
• We expect GDP to fall by about 4.5% 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

• On May 1st the prime minister, Recep Tayyip Erdogan, announced a major cabinet reshuffle to try to breathe new life into his government and reverse the slide in support suffered in the March local elections.
• A court ruled in May that there was no reason why the president, Abdullah Gul, should not stand trial in a party funding fraud case dating back to 1997.
• Turkey has reassured the Azeri government that it will not open the Turkish-Armenian border as part of the attempted rapprochement with Armenia until the border dispute between Armenia and Azerbaijan is resolved.
• Mr Erdogan, who will have the final say on whether to sign a new IMF stand-by loan agreement, has complained publicly on several occasions that the IMF is seeking excessively stringent conditions.
• The budget deficit in January-April was TL20.1bn (US$13bn), from TL5.4bn a year earlier, suggesting that the target of 5% of GDP will be difficult to achieve.
• The Central Bank cut its key borrowing rate by 50 basis points to 9.25% on May 14th. The rate has been cut by a total of 750 basis points since October.
• Following a 6.2% decline in the last quarter of 2008 the Turkish economy is expected to have plunged deeper into recession in the first quarter of 2009. In March industrial output was 20.9% lower than in the same month of 2008.

This report covers the following industry codes:
SIC Code: 60
NAICS Code: 52