Turkey: Country Report Turkey

The country (Turkey) is situated in Southeastern Europe and Southwestern Asia, bordering the Black Sea, between Bulgaria and Georgia, and bordering the Aegean Sea and the Mediterranean Sea, between Greece and Syria.

Overview

We expect the prime minister, Recep Tayyip Erdogan of the Justice and Development Party (AKP), to dominate the political scene until the next general election in 2015 and probably beyond.

The biggest challenges facing Mr Erdogan and the AKP will be introducing a new civilian-friendly constitution; consolidating progress towards peace with the outlawed Kurdistan Workers' Party (PKK) and resolving the Kurdish issue; and avoiding war with Syria. We expect the budget deficit to rise from 2% of GDP in 2012 to about 2.5-3% a year in 2013-15, as elections are scheduled for 2014 and 2015. Real GDP growth slowed from an annual average of about 9% a year in 2010-11 to 2.2% in 2012.

It is forecast to accelerate to about 3.5% in 2013 and an annual average of about 5% a year in 2014-17. We expect the current-account deficit to widen again, remaining a potential source of financial instability during 2013-17. Turkey's heavy dependence on capital inflows to meet its external financing needs leaves the economy vulnerable to global risk appetite.
 

Political outlook

Although the anti-government protests presented a critical public challenge to Mr Erdogan's authority and have dented his reputation at home and abroad, we continue to expect him to dominate Turkish politics and his party during the estimate period.

Economic policy outlook

The prospect of less aggressive monetary stimulus from the US Federal Reserve has altered the world context in which the Central Bank frames its monetary policy. We presently expect Turkish monetary policy to be tightened moderately in the next 6-18 months.

Economic forecast

We have revised our exchange-rate estimate following a depreciation of the lira in May-June. We presently expect the currency to stabilise in nominal terms against the US dollar, averaging about TL1.90-1.95:US$1 in the remainder of 2013. From 2014 we expect the lira to remain broadly stable in real terms, implying a moderate nominal depreciation.
 

Country Report Turkey July 2013

• The Economist Intelligence Unit expects the prime minister, Recep Tayyip Erdogan of the Justice and Development Party (AKP), to dominate the political scene up to and probably beyond the next general election in 2015.
• Mr Erdogan is keen to enhance the powers of the presidency before Turkey's initial direct presidential election in 2014. If he runs for the post, we expect him to be elected. However, the protests in June 2013 may have dented his support.
• The major challenges facing the government are reforming the constitution, resolving the decades-old Kurdish issue and avoiding major military confrontation with Syria.
• The budget deficit rose to 2% of GDP in 2012. For 2013-14 we estimate a further rise to 2.5-3% of GDP (owing to elections in 2014-15), before a gradual narrowing of the deficit to about 2-2.5% of GDP in 2016-17.
• Following a shift in world investor perception in May-June, we presently expect the Central Bank of Turkey gradually to tighten monetary policy and start to raise its major interest rate, the one-week repo (repurchase) lending rate.
• Annual GDP increase slowed from 8.8% in 2011 to 2.2% in 2012. We expect a gradual pick-up to about 3.5% in 2013 and to 5% a year during 2014-17.
• The current-account deficit eased in 2012, but we expect it to increase again from 2013 and to remain worryingly large, reflecting Turkey's heavy depend‑ence on imported oil and intermediates.

Review

• Mass anti-government protests spread across Turkey in June following heavy-handed police treatment of a small group of peaceful protesters resisting the redevelopment of a park in central Istanbul.
• EU condemnation of the police crackdown on the anti-government protests in Turkey and the Erdogan government's aggressive reaction to the EU's criticism has caused an abrupt cooling of Turkey-EU relations.
• Since June 11th the Central Bank has held several intra-day foreign-exchange sales to halt the slide in the price of the lira, but left all its reference interest rates on hold at the Monetary Policy Committee conference on June 18th.
• The central government budget, which covers most of the public sector, recorded a surplus of TL4.3bn (about US$2.3bn) in the initial five months of 2013, compared with a deficit of TL400m over the same period of 2012.
• According to (unadjusted) figures from the Turkish Statistical Institute (Turkstat), real GDP rose by 3% year on year in the initial quarter of 2013. The annual rate of consumer price inflation picked up from 6.1% in April to 6.5% in May.