Country Report Turkey May 2009

Summary

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.
We expect a new IMF stand-by agreement to be put in place in the coming months. It will require the government to adopt a degree of fiscal discipline, but we believe it will have some leeway to support the economy.
Given the weakness of Turkey's economy, concerns about liquidity, diminishing inflationary pressures and the likelihood of an IMF deal, we expect the Central Bank of Turkey to cut interest rates further in 2009-10.
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.

After the AKP's disappointing but by no means poor result in the local elections on March 29th, the government has resumed negotiations with the IMF and is planning to revive efforts to draft a civilian constitution.
On April 14th over 50 members of the pro-Kurdish Democratic Society Party (DTP) were arrested in raids carried out throughout the Kurdish-inhabited south-east of Turkey.
The nationalist National Unity Party (UBP) won the Turkish Cypriot legislative election on April 19th. The new government may hamper the already difficult settlement negotiations being conducted by the president, Mehmet Ali Talat.
On April 13th the Turkish government announced a new set of macroeconomic projections to replace the assumptions that formed the basis for the 2009 budget drafted before the global financial crisis deepened in late 2008.
The government has introduced temporary value-added tax (VAT) cuts on a range of goods as well as real-estate transactions to support the economy.
On April 16th the Central Bank decided to reduce its main overnight borrowing rate by 75 basis points, to 9.75%.
Industrial output fell by over 20% year on year in January-February. In the export-driven automotive industry the decline in output was a massive 58.7%.