Turkey Business Forecast Report Q2 2008

Data Revision Reinforces Our Positive Views

As the result of a major re-evaluation of statistical practices (a process that has been ongoing for six years), the Turkish Statistical Institute (Turkstat) has made a 1.6% upward revision to their headline GDP figure for 2006. Real growth rates over the past 10 years have also been revised, mostly to the upside, taking into account the first change in the base-year used to measure constant prices in a decade (from 1987 to 1998). We believe that this will have a major impact on the perception of the Turkish economy for strategic foreign investors, reinforcing its perceived potential as a long-term convergence play. With per capita GDP now pushing close to 'high income' territory, as defined by the World Bank (minimum GDP per capita of US$11,116 in 2007), the size of the consumer market in particular is likely to be reassessed to the upside. The new numbers are also a particularly positive sign for the country's EU-entry prospects.

The Chief Prosecutor of Turkey's Court of Appeal, Abdurrahman Yalcinkaya, indicted the ruling Justice and Development Party (AKP) for alleged anti-secular activities on March 14. The 162-page petition, filed with the country's top constitutional court, accuses the AKP of attempting to impose 'shari'a law' and calls for the dissolution of the party and a five-year ban from political activity for top party leaders including Prime Minister Tayyip Erdogan and President Abdullah Gul. Even if the AKP wins the case, as is our core scenario, the negative implications for the government's policy agenda would be profound. We highlight that a court case could last anywhere from six months to two years, in which time the governing party would be significantly distracted from pushing forward on its policy agenda.

Under such a scenario, divisions between the government and key secularist institutions including the judiciary and the military would likely be accentuated.

We have revised down our Turkish economic growth estimate for 2007 and our forecast for 2008, on the back of poor third-quarter GDP figures and an ever worsening global economic outlook. Our estimate is that real GDP growth fell to 4.6% in 2007, down from 6.9% in the previous year. In 2008, our core view is that the trends seen in 2007 are likely to continue, though mitigated to an extent by steadily declining real interest rates and the renewal of the government's reform agenda. Private consumption and GFCF growth are both forecast to tick up, helping to lift the headline real growth figure to 4.8%.

The pro-business Turkish government has been proactively working to move the country toward EU membership. In that vein, it has instigated a number of key institutional reforms which have helped to harmonise the country's business regulatory framework to international standards, while also significantly opening the country to foreign investors. While problems remain, including corruption at the local level and copyright infringement, we believe that the legal framework established in recent years should go a long way to help to alleviate these issues over the long term.