Country Report Turkey October 2009

Outlook for 2010-11

• The Economist Intelligence Unit expects the ruling Justice and Development Party (AKP) to remain in office beyond 2011, but tensions with the secularist/nationalist opposition and the military are likely to be destabilising.
• Negotiations to find a solution to the division of Cyprus, a major obstacle to Turkish membership of the EU, are not expected to produce a settlement during the forecast period.
• We expect a new stand-by accord to be put in place, but not until 2010, as the differences between the IMF and the government remain unresolved and global risk appetite has picked up.
• Even without an IMF agreement, the budget deficit is expected to widen to about 6% of GDP in 2009-10, before easing to a still large 4.6% of GDP in 2011.
• With inflation projected to be below official targets for 2009 and 2010, we expect the Central Bank of Turkey to lower its interest rates by a further 25? basis points by end-2009 and keep them low during most of 2010-11.
• We expect GDP to fall by about 6% in 2009, before picking up in 2010 and 2011, 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

• The government has not yet announced a detailed set of proposals to try to tackle the Kurdish issue, but the initiative remains high on its agenda.
• The two main opposition parties, the nationalist Republican People's Party and Nationalist Action Party, have expressed strong opposition to the initiative, which means that constitutional reforms will be difficult to pass.
• The sheer size of the tax fines imposed on the Dogan Media Group has raised concerns outside Turkey, particularly in the EU, over whether the impact will be to restrict freedom of expression.
• In early September Turkey and Armenia launched a serious attempt to improve relations.
• The government's Medium-Term Programme 2010-12 was announced on September 16th. It was realistic, but the IMF may ask for additional measures.
• On September 17th the Central Bank cut its overnight borrowing rate by 50? basis points, to 7.25%. The cuts total 950 basis points since October 2008.
• GDP contracted by 7% year on year in the second quarter of 2009. Although the third consecutive fall, the contraction was smaller than in the first quarter.

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