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Turkey Business Forecast Report Q4 2012

Turkey Business Forecast Report Q4 2012 - new country guide report published

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2013-01-01 02:45:54 - Turkey Business Forecast Report Q4 2012 - a new country guide report on

Our view for a sharp decline in economic activity in 2012, owing to both domestic and external factors, has continued to play out, with real GDP growth slowing to 2.9% in the second quarter. We expect growth to bottom out at current levels, but we expect to see continued evidence of a rebalancing away from an overreliance on domestic demand towards a greater focus on exports, at least over the next couple of quarters.

With relatively healthy budget and debt dynamics, the government is in a position to provide a more pronounced fiscal boost to the economy if needed, although we expect fiscal discipline to remain high up on the government´s agenda. Turkey´s external imbalances have continued to correct, with the



current account deficit narrowing on the back of tighter monetary policy in the first half of the year and weaker energy prices. We expect this process to continue over the course of 2012, but at a gradual pace.

As such, we remain wary of Turkey´s reliance on short-term foreign capital inflows and energy imports. On the monetary policy front, we expect diminishing demand-side inflationary pressures to allow the central bank increasing room for monetary easing. Turkish authorities have thus far successfully steered the domestic economy away from a hard landing, but major political challenges still face the country over the medium term.

In particular, the government will struggle to secure a multi-party consensus on the process of writing a new constitution, particularly as the Kurdish minority issue remains a major sticking point between the AKP and BDP. Moreover, Turkey faces a challenging foreign policy environment as the government attempts to cement its role as an economic and political power in the region.

Major Forecast Changes

We have revised our end-2012 lira forecast to TRY1.8000/US$ from TRY1.8500/US$ previously on account of improving currency stability this year. Moreover, in 2013 and 2014 we have revised our end-year targets to TRY1.7300/US$ and TRY1.7000/US$ respectively, from TRY1.8300/US$ and TRY1.8000/US$ previously. These changes come as a result of our view for improving sovereign credit credentials and global risk sentiment over the medium term, particularly as Turkey is set to gain investment grade status from the major credit rating agencies in H112.

Key Risks To Outlook

The major risk to Turkey´s macroeconomic trajectory still stems from its external environment. Turkey´s large current account deficit and dearth of foreign direct investment inflows leaves the country vulnerable to external shocks and a major outflow of foreign capital. As such, risks to the country´s growth outlook remain firmly to the downside.

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Mike King
Phone: London: +44 (0) 203 086 8600

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