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Country Intelligence: Report
Turkey REPORT PRINTED ON 02 AUGUST 2012
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This information was last updated on 20 JUL 2012, 1:20 PM EDT (17:20 GMT)
Outlook and Assumptions: Outlook
While the central bank's monetary policy is reducing the current-account deficit, risks to stability remain
substantial. After more than a year of unorthodox and controversial monetary policy, the Central Bank of the
Republic of Turkey (CBRT) finally began to see success in reducing external imbalances as 2011 came to a closeand through the first five months of 2012. The ongoing success of the monetary policy, including a recent
deceleration of inflation, suggests the CBRT will not deviate from its position in the near future. Even with the
current-account deficit narrowing rapidly, the overall gap remains dangerously large, keeping Turkey vulnerable to a
financing crisis should investor sentiment turn sour on the back of a major event such as the Greek exit from the
Eurozone. Although the lira is now stronger, defending the Turkish currency earlier in 2012 depleted reserves,
making the country even more vulnerable to a potential financing crisis.
The Turkish economy has come in for a soft landing, with growth momentum strong compared with the rest
of Europe. After surprisingly strong expansion in the first quarter of 2012, some deceleration may be noted in the
second, but according to leading indicators, growth should remain relatively robust in relation to the rest of Europe.
In the second half, with interest rates potentially easing somewhat at home, growth could pick up once again.
Although overall expansion for 2012 as a whole will be slow in comparison to recent years, it will almost certainly be
one of the top rates of expansion across Turkey. Export gains to Iraq and the rest of the Middle East will continue to
fuel the expansion. The recent passage of a new incentive scheme to help buoy intermediate good producers will
help to boost investment expenditures in the short term, further buoying overall GDP growth. The CBRT will be
careful to not allow domestic demand to grow too rapidly, however, for fear of undermining the continued progress
on narrowing the current-account deficit.
Sustained strong fiscal spending remains a concern, however. In its effort to facilitate its economic recovery, the
government has maintained a high level of spending, a position from which it is only slowly moving. Even with its
spending still strong, the government budget balance narrowed sharply in 2011, primarily owing to soaring revenues
coming from a rapidly expanding tax base. This surge of tax revenues allowed the government to avoid potentially
painful spending cuts in an election year. So far in 2012, the government has allowed spending to continue to surge,
a position that it must reverse moving forward to help alleviate the demands on needed financing. Given the
uncertainty in the Eurozone situation and the potential negative contagion, it is more critical than ever that the
government demonstrate a clear commitment to greater fiscal austerity in order to mitigate potential investors
worries.
Outlook and Assumptions: Domestic Assumptions
The Central Bank of the Republic of Turkey (CBRT) maintains its current monetary policy as the current-account
deficit continues to narrow. The gap remains dangerously large in 2012 and 2013, but adequate financing for the
shortfall is found.
The ongoing crisis in the Eurozone does not substantially turn investor sentiment away from Turkey. With its public
debt and overall external debt well within manageable ranges and its financial system is in many ways more stable
than many of those in Europe, Turkey avoids a strong contagion effect of the ongoing problems in Europe.
The Justice and Development Party (AK) increase their control over the government and the economy, but do not
overstep their bounds in the foreseeable future. Already, the central bank governor is thought to have close ties to
the government, resulting in its more pro-growth stance. In spite of the blurring of the separate powers, the
government does not abuse its position too much and maintains defensible policies.
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Unrest from radical Kurdish groups does not negatively affect the economy as a whole.
Outlook and Assumptions: Alternative Scenarios
The Eurozone crisis intensifies further, providing a greater challenge and financial drain on the region as a whole,
eventually overwhelming the Turks' relatively healthy financial indicators, pushing the country into a debt crisis.
Already, the country is facing too-rapid expansion of credit and heavy external financing demands. An evaporation of
capital inflows in the wake of the Eurozone debt crisis could jeopardize stability in the country.
The Justice and Development Party (AK) push through a much more aggressive centralization of power than
currently anticipated. While the AK Party does not have a Constitutional majority, it nonetheless has great political
power in the country. Its biggest detractors worry that it will ultimately undo much of the secular nature of the state
while at the same time centralizing greater power in the leadership. Should politics develop this way, some
free-market mechanisms could be threatened.
Turkeys EU accession bid is suspended, either by Brussels or by Ankara. If either side breaks off negotiations
completely, the Turkish economy could destabilize, although we believe this disruption would be limited. Turkey
would become more intimately involved with the countries of the Middle East and, more broadly, the Muslim world.
Widespread terrorist attacks spread throughout the country following the PKK's ending of its cease-fire, severely
jeopardizing vital tourism revenues and inflows of foreign capital.
Economic Growth: Outlook
Although growth may further decelerate from its first-quarter level, the Turkish economy has likely come in for a
relatively soft landing. In the second quarter, GDP expansion could be slower than was noted in the first quarter,
according to leading indicators, but as compared with the rest of Europe, growth will remain as one of the stronger rates
noted for that time. Growth momentum has been maintained by substituting European demand with increased exports to
Iraq and the Middle East. Domestic demand was relatively depressed in the first quarter and will likely be slow to recover
as the central bank has not been overly eager to loosen monetary policy. Nonetheless, with favorable current-accountnumbers being noted through the first half of the year, some easing of monetary policy in the second half can be expected,
which should help to buoy domestic demand. Overall, we anticipate GDP will growth around 3% for 2012 as a whole.
While this rate of growth will be quite slow compared with the booming recovery noted in 2010 and 2011, it will
nonetheless be one of the strongest rates of growth noted throughout all of Europe.
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In the medium term, annual growth rates will remain elevated vis--vis the rest of Europe, although annual gains will
remain much lower than they were in both the 200207 stretch and again in 201011. Rates were restrained by structural
damage to the economy from the 200809 crisis and the current sovereign risk threats, but also because of the need to
deleverage public debt, which will add a headwind through the medium term. In particular, continued European problems
are constraining growth projections for 201314, although growth of around 4% will be quite substantial compared with the
rest of Europe. Thereafter, assuming Europe begins to grow again, growth should push closer to 5% annually for Turkey
throughout the medium term as exports receive a boost and investment activity improves.
Economic Growth Indicators
2009 2010 2011 2012 2013 2014 2015 2016
Real GDP (% change) -4.8 9.2 8.5 2.9 4.2 4.1 5.0 5.3
Real Consumer Spending (% change) -2.0 5.9 7.2 1.6 4.1 3.5 4.2 4.6
Real Government Consumption (% change) 7.8 2.0 4.5 2.2 2.3 3.1 3.3 3.6
Real Fixed Capital Formation (% change) -19.0 30.5 18.3 3.3 5.9 5.4 5.0 5.6
Real Exports of Goods and Services (%
change)-5.0 3.4 6.5 7.6 4.0 4.9 5.0 4.7
Real Imports of Goods and Services (%
change)-14.3 20.7 10.6 -0.8 4.8 4.8 4.2 4.3
Nominal GDP (US$ bil.) 614.6 731.1 773.1 802.2 806.1 945.6 1,103.7 1,238.6
Nominal GDP Per Capita (US$) 8,554 10,050 10,498 10,766 10,697 12,411 14,333 15,921
Source: Historical data from selected national and international data sources. All forecasts provided by IHS Global Insight. Table updated on the
15th of each month from monthly forecast update bank (GIIF). Written analysis may include references to data made available after the releaseof the GIIF bank.
Download this table in Microsoft Excel format
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Economic Growth: Recent Developments
The Turkish economy managed to grow relatively strongly in the first quarter of 2012. In JanuaryMarch 2012, GDP
expanded 3.2% year-on-year (y/y). Although growth was the slowest it had been since the country exited its 200809
recession, it nonetheless surprised observers on the upside, far outstripping growth rates noted across most of the rest of
Europe. Sustained, strong export gains were the primary engine for overall economic expansion. Strong gains in
shipments to Iraq and the rest of the Middle East more than offset the loss of European demand, allowing the exports ofgoods and services to grow 13.2% y/y, the strongest such gain since 2007. Meanwhile, imports of goods and services fell
5.0% y/y in the first quarter, driven downward by the continued dampening of domestic demand by the Central Bank of the
Republic of Turkey (CBRT). Tight monetary policy kept household consumption from growing much at all (up just 0.3% y/y
in the first quarter) and depressed gross fixed capital investment expansion as well (up just 1.6% y/y).
Although growth decelerated in each successive quarter, GDP expansion remained vigorous in 2011 as a whole.
After soaring by 11.9% y/y in the first quarter, GDP growth slowed to 9.1% y/y in the second, 8.4% y/y in the third, and
5.2% y/y in the fourth quarters, respectively. Overall for 2011, however, GDP expansion remained strong at 8.5%.
Domestic demand propelled the economy forward in 2011. In particular, gross fixed capital formation soared by 18.3%,
vigorous credit expansion propelling ahead growth. Expansion in fixed capital investment did decelerate sharply as the
year advanced, however, with growth tumbling from 33.9% y/y in the first quarter to only 2.4% y/y in the fourth quarter.
Similarly, household consumption growth also decelerated as the year progressed, with the improvement dropping from
11.4% y/y in the first quarter to a mere 3.2% y/y in the fourth. For 2011 overall, though, household consumption grew by
7.2%. Meanwhile, the Turkish economy managed to keep its exports growing rapidly. Although base effects sharply
reduced growth in the second quarter, exports managed to expand by 6.5% for the year as a whole, inclusive of a
6.7%-y/y expansion in the fourth quarter as a whole. However, net exports were a strong contributor to growth even as
export growth slowed in the second half of the year because import growth slowed even more sharply. After soaring by
22.6% y/y in the first half, imports of goods and services edged up just 0.6% y/y in the second half of the year.
Real GDP Changes
2010 2011
GDP 9.2 8.5
Household Consumption 5.9 7.2
Government Consumption 2.0 4.5
Fixed Capital Investment 30.5 18.3
Exports of Goods and Services 3.4 6.5
Imports of Goods and Services 20.7 10.6
Source: Turkish Statistical Institute
The economic recovery in 2010 was the strongest in Europe. In 2010, GDP soared 9.2%, more than recovering what
had been lost due to the global economic crisis in 200809. With the 2010 recovery surpassing the 2009 downturn, the
economy was the largest it has ever been, both in real and nominal terms. As in 2011, the economic recovery in 2010 was
domestically driven. The Turkish banking and financial system survived the 200809 crisis in much better shape than
many of its counterparts in Europe, thus allowing for a vigorous expansion of credit. This strong revival bolstered both
household consumption and fixed capital formation. Strong domestic demand, however, did have a negative knockdown
effect on the economy, as imports grew much more rapidly than did exports, leading to a negative contribution of net
exports on headline GDP.
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Economic Growth: Consumer Demand - Outlook
Consumer confidence will resume a slow climb, although strong headwinds will continue to temper the potential
gains. Although consumer confidence is still around four-year highs, the anticipated deterioration of confidence occurred
in the second quarter due to tightening credit conditions, high inflation, and increasing worries about contagion from the
likely Greek exit. In particular, worries that the banking system may have expanded credit too rapidly in the past few years
may result in a much more conservative future of credit. Looking forward, confidence is likely to face periodic losses; in
particular, should the recent improvement of labor markets stall because of a slowdown of industrial production.
Nevertheless, it should resume an upward trend, even if it does not quite reach the 100-point demarcation line in the near
future. Historically, Turkish consumers continue to spend even in the face of strong headwinds. The Turkish population is
large and young, and remains relatively underserved by banking practices and credit. The market is seen as having great
potential for retailers in the longer term because of these favorable demographics. However, in the short and medium
term, the outlook for consumer demand remains guarded.
Economic Growth: Consumer Demand - Recent Developments
Consumer confidence remained weak in the second quarter of 2012, down from prior quarter. After averaging 93.1
in the first quarter of 2012, the consumer confidence index averaged just 91.7 in the second quarter, well below its
year-earlier levels. Rising problems with inflation, concerns of tightening lending conditions, and the worsening of the
Eurozone crisis raging just outside of Turkeys borders contributed to the second-quarter deterioration. Even after the
second-quarter correction, however, the index remains well above its level throughout most of 2007 through 2010. The
global economic crisis sent this index tumbling to a historical nadir of 68.9 as of November 2008. Aggressive interest-rate
cuts by the Central Bank of the Republic of Turkey (CBRT) from late 2008 through late 2009 and expansionary fiscal
policy aimed at reviving consumer borrowing helped to slowly build the index back up from late 2008 through late 2009.
After a period of some slippage toward the end of 2009 due to growing worries regarding labor markets, the index was
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again generally strong in 2010. In 2011, the index reached a recent peak in June, at 96.4, the highest it had been in four
years. It deteriorated throughout the bulk of the second half of the year before finally turning back upwards in the fourth
quarter of the year and spilling over into early 2012.
Stronger consumer confidence has paralleled the revival of household consumption activity. At the peak of the
global crisis, Turkish household consumption was plunging by double digits. The CBRT's aggressive actions to restore
consumer confidence, however, and the general strength of the Turkish financial sector helped limit the period during
which Turkish consumer activity contracted. As a result, as early as fourth-quarter 2009, household consumption was
reviving strongly, up by nearly 5% year-on-year (y/y). In 2010, with domestic credit expanding rapidly, household
consumption also continued to grow, up by 6.0% for the year as a whole. By the first quarter of 2011, the strength of therecovery of household consumption was actually becoming a concern, up 12.0% y/y, raising worries of overheating. CBRT
actions to temper domestic demand decreased growth, eventually to only 3.2% y/y as of the fourth quarter of 2011 and
even further, to just 0.3% y/y in the first quarter of 2012.
Economic Growth: Capital Investment - Outlook
The vigorous gains in capital investment noted through mid-2011 will not be re-attained in the near future. Efforts
to contain a gaping current-account deficit, troubles brewing in the banking sector, and the potential contagion from the
Greek exit from the Eurozone all suggest that capital investment activity in Turkey will grow much more tepidly in 2012 and
2013 than it has in recent years. Growth rates similar to what was noted in the fourth quarter of 2011 and the first quarter
of 2012 will be more the norm. A loss of export demand will drive up the amount of idle productive capacity, undermining
the needs for capital improvement. In the longer term, however, capital investment prospects will remain relatively strong.
A large, educated, young population with low labor costsas compared with the EUa central geopolitical location, and a
cooperative government intent on expanding infrastructure development and attracting foreign investors would all provide
a strong impetus for investment activity once the macroeconomic position of Europe returns to more normal conditions.
The country is still in need of significant capital improvement, particularly its infrastructure. Once investment conditions
improve internationally, the country should once again enjoy a strong increase in investment activity.
Economic Growth: Capital Investment - Recent Developments
The vigorous recovery of capital investment has given way to more modest gains in the face of the central banks
tight monetary policy. In 2010, gross fixed capital formation was in the midst of particularly strong recovery, growing
29.9%. In the first nine months of 2011, it grew even more vigorously, up 25.4% year-on-year (y/y). With strong domestic
demand fueling a rapid deterioration of the current-account deficit, the Central Bank of the Republic of Turkey (CBRT) took
more aggressive actions to try to correct the imbalances. As a result, both household consumption and gross fixed capital
formation began to decelerate sharply in the latter portion of 2011. In the final quarter, gross fixed capital formation
managed to grow, but only by 2.4% y/y. In the first quarter of 2012, growth was even weaker at just 1.6% y/y. Despite an
abundance of idle manufacturing capacity in the manufacturing sector as a whole, the private sector utilized extremely lowinterest rates and abundant credit to finance sharp increases in the stocks of their machinery and equipment and undergo
long overdue modernization and streamlining. The tightening of credit conditions towards the end of 2011 and into 2012
helped to stem the strong increases. The public sector, constrained by a need to trim the fiscal gap, has been increasing
investment with more restraint.
This revival of capital investment began from a low base. In 2009, fixed capital formation collapsed, plunging 19.0% for the
year as a whole. Higher costs of borrowing and a surge in idle capacity triggered the drop. The 2009 downturn built on a
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6.2% contraction already recorded in 2008. The downturn in 200809, triggered primarily by the shock of the global
economic downturn, was an anomaly to recent trends. From 2002 through 2006, fixed capital formation grew by double
digits annually, before finally slowing in 2007, when a peak of domestic political uncertainty and elevated interest rates
curtailed further gains. Investment growth had actually been accelerating once again in 2008 before the onset of the global
economic recession. However, by the end of 2010, investment had regained what had been lost, and any further
expansion in 2011 represented new capital investment highs.
Labor Markets: Outlook
With the Turkish economy growing more slowly in 2012 and 2013, the recent strong recovery in the labor market
is expected to backslide somewhat in the near future. While the country's industrial recovery is helping to return many
previously laid-off workers to their jobs, hiring is somewhat guarded as uncertainty regarding future conditions remain
strong. Having laid off thousands of workers from late 2008 through early 2010, Turkish manufacturers are attempting to
boost their productivity levels and guard against future economic downturns by re-hiring workers slower than they
dismissed them. With another economic slowdown in the offing, this reticence in re-hiring will intensify further in the near
future. Nevertheless, we do not expect a major worsening, but rather more of a flattening of employment growth. As such,
the downward push of unemployment should cool in the second quarter of 2012 and beyond before once again pushing
downward in subsequent years. Nevertheless, the improvement in the longer term will be slow, not returning jobless ratesto pre-crisis levels until around 2016 or so.
In the longer term, the greatest challenge for the Turkish labor market will be creating enough jobs to deal with an
expectedly sharp rise in labor participation. Although the official unemployment rate in Turkey is similar to the rates
noted throughout the rest of Europe, its labor-force participation rate is significantly lower. According to a World Bank
study, job creation going forward will be limited by the current large employment in the agricultural sector and unusually
stringent labor regulations. The first of these problems is relatively unavoidable. In its economic development, Turkey will
shed agricultural jobs and add industrial and service jobs. On the latter point, the World Bank urged sweeping reforms to
address high severance packages, limitations on temporary work, and high social security costs. The country must also
combat its pervasive shadow economy, against which potential legitimate employers must compete. Finally, with female
labor-force participation far below the European average, enough jobs must be created as the government pushes to
increase participationfrom 26% in 2009 to 35% in 2023, according to the June 2010 National Employment Strategy.
Labor Markets: Recent Developments
The vigorous economic recovery undid much of the damage done to employment markets by the 2009 downturn.
Even as economic growth slowed, past strong gains continued to drive unemployment down in the first quarter of 2012.
The officially registered jobless rate stood at 10.4% in JanuaryMarch 2012, down from 11.5% a year earlier. In 2011 as a
whole, this same rate had averaged 9.8%, 2.1 percentage points down from its 2010 level. The average annual jobless
rate was the lowest it had been since 2001. Total employment increased by 6.7% over the course of the year, driving thenumber of those out of work downward by 14.2%. Total labor force participation improved from 48.2% in 2010 to 49.1% in
2011. When combined with surveys suggesting why people were out of the labor force, it seems the gray economy was
reduced in 2011. When measured using EU standardized methodology, the jobless rate was even lower than the officially
reported data, suggesting an unemployment rate of only 8.8% for 2011 as a whole. While the addition of jobs and
reduction of unemployment did deteriorate slightly in the fourth quarter of 2011, it did so only modestly.
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Labor-force participation remains below the EU average, particularly among women, of whom less than
one-quarter are employed outside of the house. Unemployment rates would be significantly higher than currently noted
if labor-force participation was at the EU levelthose that are now out of the labor force would instead be listed as
officially unemployed. According to a 2010 National Employment Strategy, an emphasis through the medium term is being
placed upon an increase of women in the workforce, although as 2012 began, little progress was yet noted. As that
participation rate increases with more women entering the labor force, pressure might build for emigration to the EU if job
creation is not significantly accelerated in Turkey.
Inflation: Outlook
Monetary policy is working more effectively than we had anticipated, although we believe a further deceleration
will be difficult. The lowering of global energy price forecasts has helped to reduce the upward pressure on Turkish
inflation in the near term, but we believe that low interest rates will fuel greater domestic demand, undermining the
countrys ability to further reduce annual inflation rates. Additionally, potentially new hikes to excise duties will further
confound efforts to drive annual inflation rates down further. In the third quarter of 2012, annual inflation is projected to
remain in the high single digits. By the fourth quarter, in large part because of favorable base effects, annual inflation could
come down much more rapidly, likely reaching or even surpassing the central banks end-year inflation forecast of 6.5%.
The central bank, in fact, has indicated it would downwardly revise this figure soon, potentially to around IHS Global
Insights own end-year forecast of 5.7%. Despite the drop-off of inflation at the end of the year, annual average consumer
price inflation will remain up from 2011, thanks to strong expansion in the first part of the year. In 2013, annual inflation
could trend upwards as domestic demand returns.
Inflation Indicators
2009 2010 2011 2012 2013 2014 2015 2016
Consumer Price Index (% change) 6.3 8.6 6.5 8.8 6.5 5.7 4.9 4.5
Wholesale-Producer Price Index (% change) 1.2 8.5 11.1 6.6 6.3 6.4 5.5 4.7
Source: Historical data from selected national and international data sources. All forecasts provided by IHS Global Insight. Table updated on the
15th of each month from monthly forecast update bank (GIIF). Written analysis may include references to data made available after the release
of the GIIF bank.
Download this table in Microsoft Excel format
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Inflation: Recent Developments
Inflation is decelerating, yet remains elevated in 2012 vis--vis 2011 levels. The restrictive monetary policy of the
Central Bank of the Republic of Turkey (CBRT) has found success in finally driving down elevated annual inflation rates. In
June 2012, annual consumer price growth was down to 8.9%. Although still elevated as compared with the 6.2% rate
noted as of the same time in 2011, it nonetheless represents a sharp cooling from two months earlier when the inflation
rate had topped 11%. Throughout the first three quarters of 2011, annual inflation had been at historical lows of between
4% and 6% for the country. Over the final quarter of last year, however, annual inflation accelerated, eventually ending
2011 at 10.4%, far surpassing the 5.5% end-year CBRT target. Elevated global energy prices, uncertainty over the
CBRTs flexible monetary policy, and stronger domestic demand all contributed to the run-up of inflation late in 2011. In
2012, however, the energy price outlook has come down, and the CBRTs monetary policy has gained some comfort,
allowing inflation to trend downward.
After reaching a plateau in late 2011, annual producer price inflation is weaker. From April 2011 to late in the year,
annual producer price inflation steadily accelerated. The negative external shocks on prices at the beginning of 2011 hada direct effect on producer price inflation. Specifically, annual producer price growth jumped from 8.9% as of end-2010 to
10.9% as of February 2011. After easing slightly in subsequent months, inflation began its steady march upward in April,
reaching to 13.7% as of November. Since that milestone, inflation has generally eased, standing at 6.4% as of June 2012.
Exchange Rates: Outlook
We anticipate that the Turkish lira will continue to remain relatively strong vis--vis the US dollar in 2012. Any
nominal depreciation will be modest and represent a relative stability or even strengthening in the real effective exchange
rate. However, the regional concerns regarding the Eurozone crisis will cause some lira losses, even as the countrys own
sovereign risks slowly improve (mainly because of the narrowing of the current-account deficit). With the success of the
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central banks monetary policy, there will be no shift to a more orthodox policy. The continued improvement of the
current-account deficit will help to buoy the lira nonetheless.
In the longer term, the lira will be stable and strong. Assuming that the CBRT and the government succeed in taming
domestic demand and eventually begin to reduce the countrys external obligations, we anticipate that the Turkish lira will
once again resume gaining value in the longer term. Previous worries that the lira might be overvalued have been
dissipated due to the sharp losses noted since 2008. Gains in productivity from increasing capital inflows and the general
push towards greater EU integration should bolster the strength of the lira.
Exchange Rate Indicators
2009 2010 2011 2012 2013 2014 2015 2016
Exchange Rate (LCU/US$, end of period) 1.49 1.54 1.91 1.82 2.00 1.77 1.72 1.70
Exchange Rate (LCU/US$, period avg) 1.55 1.50 1.67 1.80 1.97 1.85 1.75 1.71
Exchange Rate (LCU/Euro, end of period) 2.15 2.06 2.47 2.28 2.30 2.32 2.36 2.43
Exchange Rate (LCU/Euro, period avg) 2.15 1.99 2.33 2.30 2.30 2.31 2.34 2.39
Source: Historical data from selected national and international data sources. All forecasts provided by IHS Global Insight. Table updated on the
15th of each month from monthly forecast update bank (GIIF). Written analysis may include references to data made available after the release
of the GIIF bank.
Download this table in Microsoft Excel format
Exchange Rates: Recent Developments
With the success of monetary policy, the Turkish lira has found stability and remains stronger than it had been at
the beginning of the year. As 2012 opened, the Central Bank of the Republic of Turkey (CBRT) was in the midst of a
strong defense of its currency. In December 2011, worries had mounted that the CBRTs policy mix had not done enough
to stem domestic demand and begin to correct the countrys growing external imbalances, compromising the liras stability.
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By 30 December 2011, the Turkish lira had dipped to a historical low, falling below 1.911 per US dollar. This fall triggered
an aggressive reaction from the CBRT, which flooded the foreign-exchange market with more than USD3 billion of dollar
sales in the final trading day of 2011 and another USD650 million of sales in the first trading day of 2012. In all, this helped
push the lira back to 1.881 per US dollar at the close of 3 January. In the month and one-half that followed, the lira
continued to steadily rally, so by late February, the lira was up to 1.738 per US dollar. Since then, the lira has been
generally strong in spite of some temporary setbacks, showing particular resiliency in recent weeks and months as the
CBRTs monetary policy has begun to find more and more success in reducing the current-account deficit. By mid-July,
the lira was trading at 1.806 per US dollar, 5.5% stronger in nominal terms than it had been at the close of 2011. The
turn-of-the-year defense drew down official reserve levels, but since that initial foray, the bank has had to be less active,
stemming the sharp drawdown.
The lira was generally weaker in the latter portion of 2011. At the outset of 2011, the CBRT had intended to weaken
the currency by pushing interest rates downward to reduce the inflow of foreign capital. By the end of the first half, the lira
exchange rate was down to TRY2.350/EUR1.000, nearly 20% weaker than when the CBRT initiated its policy in
December 2010. In the second half, however, the lira depreciated more rapidly than the CBRT would like because of
mounting worries of overheating and the CBRTs poor policy responses to those concerns. In general, from July until the
meltdown in late December, the lira went through periods of sharp depreciation followed by a stabilizing of the exchange
rate in response to CBRT actions.
Economic Policy: Monetary Policy and Outlook
The Central Bank of the Republic of Turkey (CBRT) is unlikely to waver from its current, unorthodox monetary
policy in the foreseeable future. The most likely interest-rate move sometime in 2012 will be a further reduction in the
interest-rate spread for overnight lending/borrowing, given its success in reducing the current-account deficit and inflation,
in hopes of discouraging too much of an influx of hot portfolio capital. Specifically, the top rate will almost certainly come
down from 11.5% sometime in the next few months. Along with a slight expansionary effect of the lower rate, reducing the
spread would also alleviate some day-to-day uncertainty in what interest rates might be in use. Nevertheless, there is little
indication that the bank will abandon its approach altogether, and the headline policy rate will almost certainly remain
unchanged for several more months. With the continued success of both reducing external imbalances as well as inflation,
it is becoming less likely that the CBRT will need to revert to a more orthodox approach to monetary policy, instead likely
standing by its current monetary policy throughout the remainder of 2012 and into 2013. For now, the biggest failure of the
current approach is sticky inflation, an outcome that the CBRT may be willing to live with given the success in reducing
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external imbalances and the fact that at least inflation is now in high single digits instead of low double digits. The CBRT
would only acquiesce to a shift away from the current approach if the countrys financial markets and foreign investment
inflows are indeed eventually threatened by shifting sentiment.
Monetary Policy Indicators
2009 2010 2011 2012 2013 2014 2015 2016
Policy Interest Rate (%, end of period) 6.50 6.50 5.75 5.75 5.75 5.50 4.75 5.25
Short-term Interest Rate (%, end of period) 17.65 15.27 14.22 15.40 13.41 11.01 9.17 8.00
Long-term Interest Rate (%, end of period) 17.20 14.99 14.19 15.50 14.43 13.08 11.86 9.30
Source: Historical data from selected national and international data sources. All forecasts provided by IHS Global Insight. Table updated on the
15th of each month from monthly forecast update bank (GIIF). Written analysis may include references to data made available after the release
of the GIIF bank.
Download this table in Microsoft Excel format
Economic Policy: Monetary Policy - Recent Developments
The Central Bank of the Republic of Turkey (CBRT) is currently in a cautionary monetary position, while still
maintaining flexibility in its approach. The hallmark of the current approach to monetary policy has been a shift in
interest-rate policy from reliance upon its main policy rate to the overnight interest-rate corridor between lending and
borrowing rates. The CBRT has left its main policy rate unchanged at 5.75% since August 2011. We do not anticipate any
change to this policy rate in the near future. The CBRT currently is putting more emphasis on the spread between the
overnight lending and borrowing rates. At its 21 February 2012 meeting, the CBRT reduced the top of this spread (the
overnight lending rate) from 12.5% to 11.5%, while the bottom of the spread (the overnight borrowing rate) remained at
5.0%. The CBRT is allowing interest rates to fluctuate within this corridor in order to try to achieve exchange-rate stability.
Depending on demand for the lira, the CBRT releases funds somewhere either towards the top or bottom of this corridor.
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Normal days see the CBRT releasing funds at the countrys main policy rate. Exceptional days have the CBRT
releasing funds at a rate of around 11%. The CBRT also regularly changes the value of its repo auctions to also attempt to
stabilize the currency. Unfortunately by pursuing this strategy, interest-rate planning is sacrificed, a negative impact on
potential investors in the country. This policy approach previously garnered criticism for not being effective enough in
addressing the countrys massive external deficits, although in more recent months, much of that critique has been
counteracted by the surprising success in driving down the current-account imbalance and a downward drift of inflation.
More emboldened than ever, the CBRT shows little signs of retreat from its current position and held all policy rates
unchanged at its July meeting. The Monetary Council even began showing signs of relaxing monetary policy somewhat,
although it remains restrictive overall.
Although perhaps equally controversial, the CBRT's policy position is nonetheless evolving from its approach in
the first half of 2011. Beginning late in 2010, the CBRT launched a policy mix of low interest rates and tighter reserve
requirement rates (and other administrative measures). The CBRT had hoped that by maintaining low interest rates, the
influx of "hot" portfolio investment that had previously driven great financial sector instability would be limited. These
inflows had also boosted the Turkish lira, limiting Turkish export competitiveness and boosting import demand. Meanwhile,
to counter the expansionary nature of low interest rates, tighter restrictions on lira holdings would help drain the domestic
economy of excess liquidity, encouraging a sharp slowdown of credit and monetary growth. Through the first half of 2011,
the policy mix had little impact on credit growth or stemming the rapid deterioration of the current-account deficit. In the
third quarter, however, progress was noted. The annual rate of growth of domestic credit, persistently running at around
35% through the first half of the year, finally dropped below the CBRT's unofficial 25% target in September, where it has
remained below since. Meanwhile, the deterioration of the current account eased significantly in the third and fourth
quarters, just as the CBRT had anticipated.
Economic Policy: Fiscal Policy and Outlook
While the governments 2012 budget plan is relatively strict, markets may force the government to eventually cut
spending more substantially. As adopted, the government budget deficit is planned to be TRY21.1 billion for 2012 as a
whole, or what IHS Global Insight estimates would be around 1.5% of GDP. In line with a fairly small fiscal deficit, Finance
Minister Mehmet Simsek stated that public debt could ease from 39.8% of GDP in 2011 to 37.0% of GDP in 2012.
However, the 2012 budget as adopted may be significantly altered before the end of the year. Growth will likely disappoint
as compared to the budgets assumption, undermining potential revenue gains. Moreover, there remains an unwillingness
by the government to significantly cut spendingas demonstrated by the continued sharp rise of expenditures through
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May 2012relying instead on increasing revenues. In fact, the government plans to increase state employment by 90,000
in an effort to ward off the potential deterioration of the labor markets as the negative ramifications of the Eurozone debt
crisis hits Turkey. A more substantial effort to cut spending would help calm markets that remain jittery over the countrys
dangerously large external imbalances. However, we expect that even with the fiscal problems, the countrys primary
budget balance will remain firmly in surplus in 2012, with interest spending estimated to be around TRY50 billion.
Economic Policy: Fiscal Situation - Recent Developments
The leading, cash-budget indicators show that the government continues to allow spending to rise quickly.
Through the first five months of the year, these cash-budget data indicate a 16.3% year-on-year (y/y) increase in
non-interest expenditures. Even with the still-strong gain in spending, the overall primary budget balance improved y/y in
JanuaryMay 2012, to 20.221 billion lira (up from TRY16.166 billion in the same period of 2011). Although economic
growth is presumed to have slowed in the first quarter of 2012, budgetary revenues nonetheless grew rapidly in
JanuaryMay 2012, up 17.6% y/y.
The booming economy pushed Turkeys consolidated budget deficit downward to 1.3% of GDP in 2011, a
five-year low and easily besting the 2.8%-of-GDP target. Budgetary revenues boomed due to the strong economy,
rising by 16.3% on the back of a 20.5% surge in tax revenues. Meanwhile, expenditures grew much more modestly, up
6.4%, allowing for the sharp improvement in the headline fiscal balance. Although the government did keep spending from
growing too rapidly, the slow gain in overall expenditures was much more a reflection of lower interest paymentsdown
12.6%than any excessive austerity measures by the government. Non-interest expenditures still grew 10.1%. Thus, the
overall primary balance did not improve as dramatically as the consolidated headline figure did. Nevertheless, the country
posted a primary surplus of 1.7% of GDP for 2011 as a whole.
After a disastrous 2009, the Turkish government re-tightened fiscal policy in 2010. In 2010, Turkey posted a
consolidated budget deficit equivalent to 3.6% of GDP. The shortfall represented a sharp correction as compared with
2009, when the government ran a shortfall of 5.5% of GDP. In addition, for 2010 as a whole, the fiscal deficit came in
below the government's earlier projection of TRY44 billion, or 4% of GDP. The critical primary budget balancethe overall
budget balance minus interest expendituresfor 2010 was in surplus by TRY6.215 billion, a positive turnaround from the
TRY4.371-billion shortfall posted in 2009. The country's fiscal state was aided by a strong surge in tax revenues, the resultof the strong domestic demand recovery. Further contributing to the sharp improvement in the state's finances, the
government also successfully limited spending increases, and interest expenditures were alleviated by falling rates.
External Sector: Outlook
For 2012, we project that the current-account deficit will dip close to 8.0% of GDP for the year as a whole. While
that gap still represents a major risk to continued stability in the country, it nonetheless represents a significant
improvement against the 2011 level. The improvement of the current-account deficit in the final months of 2011 and early
2012 was much more substantial than we had previously anticipated. This sharp narrowing of the current-account deficit
gives some hope that the overall deficit may be substantially reduced in 2012, at least as a share of GDP. The Central
Bank of the Republic of Turkey (CBRT) is seemingly choosing to address the current-account deficit as its top priority
rather than battling inflation, although the latter has even begun to drift downward. With global energy prices now forecast
to be lower than previously expected, further strong gains in the current account can be expected over the remainder of
2012. Some improvement will be moderated as the CBRT will likely ease monetary policy at home, preventing the current
fall of imports to continue unabated. Even with the strong improvement in the current-account deficit, the gap remains
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large enough to put immense strain on the countrys ability to find financing given the risk aversion that remains strong in
the shadow of the Eurozone debt crisis.
Trade and External Accounts Indicators
2009 2010 2011 2012 2013 2014 2015 2016
Exports of Goods (US$ bil.) 109.6 120.9 143.5 157.1 168.3 179.8 191.7 204.3
Imports of Goods (US$ bil.) 134.5 177.3 232.9 237.5 251.2 266.2 280.2 294.9
Trade Balance (US$ bil.) -24.8 -56.4 -89.4 -80.5 -82.9 -86.4 -88.5 -90.6
Trade Balance (% of GDP) -4.0 -7.7 -11.6 -10.0 -10.3 -9.1 -8.0 -7.3
Current Account Balance (US$ bil.) -13.4 -46.6 -77.2 -66.6 -66.0 -68.2 -68.9 -73.8
Current Account Balance (% of GDP) -2.2 -6.4 -10.0 -8.3 -8.2 -7.2 -6.2 -6.0
Source: Historical data from selected national and international data sources. All forecasts provided by IHS Global Insight. Table updated on the
15th of each month from monthly forecast update bank (GIIF). Written analysis may include references to data made available after the release
of the GIIF bank.
Download this table in Microsoft Excel format
External Sector: Recent Developments
The gradual narrowing of the current-account deficit that began in late 2011 intensified through the first five
months of 2012. In JanuaryMay, the current-account deficit dropped to USD27.051 billion, more than USD9.9 billion
smaller than it had been in the same period of 2011. In the first five months of the year, merchandise imports fell 0.8%
year-on-year (y/y), facilitating the decline in the overall current-account imbalance. In spite of weak demand from the
EUTurkey's biggest trade partnermerchandise exports managed to grow a vigorous 13.3% y/y, buoyed by increasing
demand from Iraq and the rest of the Middle East. While the current-account balance improved y/y, the net flow of
non-debt-creating foreign capital worsened. Net foreign direct investment inflows dropped from USD4.748 billion in
JanuaryMay 2011 to just USD3.833 billion in the same period of 2012, while the net inflow of portfolio investment
plunged from USD15.039 billion to USD6.805 billion.
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The current-account deficit reached 10% of GDP in 2011, a historically large shortfall for the country. The
current-account gap had been rapidly widening vis--vis year-earlier levels throughout the first 10 months of 2011, with the
countrys overall shortfall nearly doubling in nominal US dollar value. However, in the final two months of the year, the
efforts of the Central Bank of the Republic of Turkey (CBRT) to reduce the current-account deficit finally began to show
dividends, the headline current-account deficit narrowing first by 8.5% y/y in November and then by 12.8% y/y in
December. The USD77.089-billion current-account deficit for 2011 is equivalent to right at 10% of GDP. The shortfall is
dangerously large and is the highest such gap ever recorded for Turkey. As the year came to a close, the deterioration of
the merchandise trade deficit slowed, facilitating the turnaround in the headline current-account balance. Import growth
slowed sharply in the final months of the year in response to an effort to stem domestic demand. This slowdown would
have had an even greater impact if not for a similar deceleration of export growth due to the worsening of export
conditions to the rest of Europe. Also contributing to the narrowing of the current-account deficit in the final months of the
year, income outflows dropped off precipitously in the latter stages of 2011.
While Turkeys current-account deficit worsened substantially in 2011, inflows of non-debt-creating financing
improved to offset some of the increased danger. The net inflow of foreign direct investment (FDI) and of portfolio
investments both soared vis--vis their 2010 levels. Nevertheless, the improvement in non-debt-creating capital inflows
was only enough to offset about one-third of the worsening in the current-account deficit. As such, the difference was
made up by a rise in debt and a reduction in reserves (whereas in 2010, the country added significantly to its reserves).
Additionally, the countrys errors and omissions line was much larger in 2011 than in the previous year, a reflection of
greater inflows of previously foreign-sheltered capital back to the country.
Economic Structure and Context: Development and Strategy
Economic Development
Until the turn of the century, Turkeys economy struggled through years of dichotomy, torn between a dynamic
private sector and a laggard quasi-public sector. Economic policy was caught between a deeply rooted tradition of
government control and market-oriented economic reforms. Remnant influences of state control proved to be problematic,
evident in the multiple crises the economy endured over the past 1020 years. State-directed lending through banks
regularly flooded the economy with liquidity, causing endemic inflation and undermining the value of the currency. A
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combination of subsidization and public-sector banks triggered excessive bad debt and chronic government indebtedness,
characterized by double-digit fiscal deficits. The economic system was further compromised by political instability within
the country. Torn between conservative Islamists, the fiercely secular military, and economic reformers, no politician or
political party had the unity to stand behind much-needed economic reforms until after the turn of the century.
The economy was characterized by a spate of stop-and-go economic development. Recession was repeatedly
experienced. Rising trade, current-account, and budget deficits, high foreign-currency borrowings by banks, and a
government at its domestic borrowing limits all put pressure on the lira, which triggered several administrative
devaluations. In 2001, the lira crisis delivered the government into the arms of the International Monetary Fund (IMF) with
a huge bailout package, accompanied by a raft of promises toward fiscal austerity and reforms, including theestablishment of a free-floating lira. The Turkish government continued to receive IMF support until 2008, following the
successful completion of a final stand-by agreement.
Since the 2001 bailout, economic policy provided the foundation for much more sustainable economic recovery.
Key to the success has been the measure of political stability afforded the country by the rise of a single-party government
controlled by the moderate Islamic Justice and Development (AK) Party. The AK Party, for their part, embarked upon
IMF-mandated reforms that have bolstered the independence of the financial sector and slowly have begun withdrawing
the government from the economy. Investors slowly began returning to the economy as the lira crisis faded, leading to
equity and bond price rises.
Economic Strategy
The coming to power of the AK Party solidified a reformist program aimed at breaking decades of corporate
mismanagement and ingrained, inflationary expectations. Those policies activated by the AK Party include:
A free float of the currency that redistributes stress on inflation control elsewhere among monetary authorities and
provides an early warning to potential balance-of-payment crises.
The central bank has been granted operating authority over interest-rate policy.
The government has maintained a large primary fiscal surplus, even though it has waned somewhat in recent years.
The interest costs of debt servicing exact a heavy burden, demanding ambitious surplus targets.
Inflation has been falling, now generally running at its lowest levels in over 30 years.
Widespread structural reforms have been undertaken, most particularly in the banking system.
Economic reforms were conducted in close consultation, if not always in exact harmony, with the IMF. Even given
the impressive progress made since 2001, the country remains vulnerable to international crises and relapses of itscrisis-prone history. In fact, reforms initiated since 2001 have helped to limit the severity of economic disruption. In
addition, with both a comfortable reserve base and flexibility within the currency, the authorities are much better equipped
to defend against exogenous shocks than they had been previously. This level of advancement was demonstrated during
the 200809 global economic crisis and the ongoing Eurozone debt crisis. While the country has been hurt by the weight
of the international downturn, enacted reforms have helped avert a larger collapse of the type seen in many other
countries of the region.
Economic Structure and Context: Demographics and Labor Markets
The Turkish population increased from 66.5 million in 2000 to an estimated 75.7 million in 2010 and is projected to
reach 83.9 million by 2020. Turkey has the second-largest population among European Union (EU) members or
candidate countries, after Germany. Nevertheless, despite its large size, the density of the population will remain
considerably lower (90 persons per square kilometer) than the average of the EU countries, estimated at around 118
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people per square kilometer. We expect that the process of urbanization will continue at similar rates to those witnessed in
the last several years. For comparison, the urban population reached 44 million people in 2000, or 65% of total population,
up from 60% some 10 years earlier.
The Turkish population is and will continue to be one of the youngest in Europe, with 58% of the population
below 30 years of age. According to a 2000 census, 32.8% of the population was under 14 years and 62% was in the
age group of 15-64 years. The number of elderlyrepresented by the population aged above 65 yearsgrew to 5.3% of
the total population. The number of people below 30 years of age is projected to increase to 41.7 million by 2015, but their
share of the total population will decrease to 51%. From 1999 to 2015, this represents a total fall of 14% in this age
bracket.There are those who believe theOfficial unemployment in the country is given at around 1015% of the workforce.
true level of unemployment within the country is underreported and the real level is actually five percentage points higher.
On the other hand, extensive black market operations may make actual unemployment much lower that what is officially
reported, with many workers operating outside of official measure. Another potential cause for the difference in
unemployment rates is accounted for by differing estimates in the labor participation rate. At a little less than half the total
population, Turkey has one of the lowest labor participation rates in the Organisation for Economic Co-operation and
Development (OECD), a figure that has actually been in decline over recent decades. This low participation rate is
primarily due to the lack of female participation in the economy, a problem that is only slowly being addressed. As more
women enter the labor force, demand for employment will rise, putting further stress on the countrys lack of job creation.
Unemployment levels have been slow to fall with public-sector restructuring, particularly with reference to state and
quasi-state concerns.
Economic Structure and Context: Monetary System
The central bank works in autonomy to meet government inflation targets. The governor is appointed to a five-year term by
the prime minister, as approved by the president. With the appointment of the previous governor, Durmu Yilmaz, in early
2006, worries were high that the central bank might fall under too much control of the government. Yilmaz proved to be an
able governor, earning extremely high marks for guiding the country through the 200809 global financial crisis. The
Central Bank of the Republic of Turkey (CBRT) was among the most aggressive central banks in the world in acting to
offset the negative effects of the global economic crisis in 200809.The current governor, Erdem Bai, has faced greater
scrutiny given the central bank's more unorthodox monetary policy in 2011 to address overheating concerns. Worries have
once again arisen that the CBRT governor is operating under too much pressure from government quarters. Nonetheless,
institutionally, the bank remains strictly independent.
The central bank maintains the Turkish currency, the lira, on a free float. Nevertheless, it will intervene against what it
regards as unjustified corrections regarding the lira. The central bank utilizes interest-rate manipulations as well as a
whole breadth of monetary policy tools to affect the lira's value.
Economic Structure and Context: Financial System
The banking sector had been the economy's Achilles' heel until 2001, but it has since been exactly the opposite, a source
of strength. Prior to 2001, state-controlled (or more accurately, party-controlled) banks bankrolled nationalized industries
to the cost of growing bad debt. The creation of the Banking Regulation and Supervisory Agency, in line with the
International Monetary Fund (IMF), put the cost of cleaning up the banking sector's bad debt at a little short of USD50
billion in 2001, around one-third of GDP at that time. After significant privatizations and asset-sheet clean-ups, the banking
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system under the country's credit package with the IMF is in a position of much better health. By 2005, non-performing
loans (NPLs) as a percentage of total loan assets were down to below 10%well under the near-30% level that NPLs
reached in 2001. To achieve such improvement, the government allowed a significant influx of foreign participation,
although unlike many of the other countries of Central and Eastern Europe, the majority of banking assets remained in
Turkish hands, limiting the country's exposure to the European banking debt problems of 2009 and 2010. In fact, the
country's financial system came through the global crisis with flying colors, providing a source of potential growth for the
near future. In 2011 and now into 2012, there are worries that the banking system is once again facing troubles, with asset
quality rapidly deteriorating because of the sustained, rapid expansion of the system. However, compared with the
banking systems of Europe, Turkeys remains relatively worry-free.
The bourse is relatively young, with the Istanbul exchange being founded in 1985. Although it remains extremely small and
of little impact on the economy as a whole, it is one of the livelier among emerging markets, with over half of stock traded
being held by foreigners. Foreigners have been able to trade unrestricted on the exchange since 1989. Indeed, one of the
weaknesses of the exchange has been a lack of domestic funds for investment, stifled by the heavy presence of banks
within the economy. Thus, during times when global capital is averse to riskier economies, the bourse takes a heavy hit. In
keeping with the nature of the rest of the economy, the exchange suffered from notable volatility in its beginning, although
it has been much steadier in recent years. There is the belief in the country that as banking reform continues, deeper
capital markets will provide a more solid financing base to further future growth.
Economic Structure and Context: Key Sectors
Turkeys industrial sector is well developed. Main areas of specialization include textiles and clothing, ceramics and
glass, steel, chemicals, and light consumer goods. The production of automobiles is a leading growth sector.
Turkey's vibrant manufacturing sectors complement well the energy-rich, new markets to its northeast around the
Caspian Sea, as well as established markets in the Middle East and Europe, to which it is uniquely positioned.
While the country's agricultural dependence is easing, it remains a significant source of value added to GDP.
Moreover, given the country's fertile and vast area, it will likely remain a significant contributor to the economy as a
whole for some time to come. The sector could benefit from greater technological transfers and improved
infrastructure, and it remains vulnerable to shifting weather conditions.
For other energy resources, Turkey is heavily dependent on imported oil and gas. Power capacity is set to increase,
but Turkey is not yet self-sufficient in electricity. The country hopes to become a key energy middleman between the
markets of Europe and the production of Russia and Central Asia.
Services are growing fast on the back of the media, transport, and tourism sectors. The tourism sector, in particular,
has been instrumental in helping the economy find greater balance on the external accounts, becoming a key earner
of foreign currency.
Turkey: Top-10 Sectors Ranked by Value Added
2011 Level 2012 Percent Change Percent Share of GDP
(Bil. US$) (Real terms) (Nominal terms)
1. Agriculture 77.4 1.6 10.5
2. Real Estate 55.3 2.5 7.5
3. Retail Trade - Total 48.2 1.3 6.6
4. Wholesale Trade 44.4 2.7 6.1
5. Business Services 42.5 2.7 5.8
6. Communications 41.3 0.2 5.6
7. Construction 34.0 3.5 4.6
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8. Public Admin. and Defense 33.1 -0.9 4.5
9. Education 24.9 0.4 3.4
10. Land Transport 21.1 2.5 2.9
Top-10 Total 422.1 57.6
Source: World Industry Service, IHS Global Insight, Inc.
Updated: 17 Jul 2012
Economic Structure and Context: Natural Resources
Agricultural resources in the country are relatively rich in a series of diverse cereal, cash, and fruit crops. More specifically,
the country's agricultural production is greatest in tobacco, cotton, grain, olives, sugar beets, and citrus fruits. The country
is also the leading exporter of hazelnuts.
Substantial mineral reserves exist in copper, zinc, lead, and gold. The country is a leading global exporter of chrome.
Some oil deposits exist within the country, but are not enough to meet domestic demand. Natural gas deposits only supply
around 2% of domestic consumption. The country is developing itself to become a key transit point for Russian and
Central Asian raw energy products. More resources are being poured into further development of energy refining. The
country has substantial reserves of coal, estimated at around 1 billion tonnes.
Tourism potential in the country is considerable. Its diversity includes beach resorts to spectacular countryside, numerous
antiquities, and cosmopolitan cities.
Economic Structure and Context: Trade Profile
Turkeys trading patterns are undergoing significant changes. The evolution of Iraq in recent years has led to a rapid
resumption of trade with that country. The Iraqi market is fast becoming a key destination for Turkish exports. Additionally,
the country has been aggressive in building up its markets in both the Middle East and Africa, attempting to broaden itsexport base. As a result, trade with the United Arab Emirates has soared. Turkey is trying to mimic its success in sending
goods to the United Arab Emirates with the other countries throughout the Arab world. Otherwise, the countries of the
European Union (EU) and the United States are the countrys primary trading partners. On the import side, cheap Chinese
imports are securing an increasing share of total imports into the country. In addition, new energy pipelines from Russia
and Central Asia are causing trade with those countries to grow rapidly.
The makeup of Turkeys commodities trade is also evolving. Chinese imports received a boost at the beginning of 2005
with the cessation of textile and apparel restrictions. The ending of these international restrictions have undermined
Turkeys ability to export its own apparel and textiles to the rest of Europe and the world, with it now facing greater
international competition. Prior to the current economic crisis, the country had been rapidly increasing as an automotive
exporter. Energy imports and exports are growing rapidly, as Turkey is positioning itself to be a key trading point between
the crude energy providers of Russia and Central Asia and the Middle East and the markets of Europe.
Turkey: Major Trading Partners, 2010
EXPORTS IMPORTS
Country Billions of USD Percent Share Country Billions of USD Percent Share
Germany 11.5 10.1 Russia 21.6 11.6
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United Kingdom 7.2 6.3 Germany 17.5 9.5
Italy 6.5 5.7 China 17.2 9.3
France 6.1 5.3 United States 12.3 6.6
Iraq 6.0 5.3 Italy 10.2 5.5
Russia 4.6 4.1 France 8.2 4.4
United States 3.8 3.4 Iran 7.6 4.1
Spain 3.6 3.1 Spain 4.8 2.6
United Arab Emirates 3.3 2.9 South Korea 4.8 2.6
Iran 3.0 2.7 United Kingdom 4.7 2.5
Source: IMF, Direction of Trade
Turkey: Major Trading Partners, 2000
EXPORTS IMPORTS
Country Billions of USD Percent Share Country Billions of USD Percent Share
Germany 5.2 18.6 Germany 7.2 13.2
United States 3.1 11.3 Italy 4.3 7.9
United Kingdom 2.0 7.3 United States 3.9 7.2
Italy 1.8 6.4 Russia 3.9 7.1
France 1.7 6.0 France 3.5 6.5
Netherlands 0.9 3.1 United Kingdom 2.7 5.0
Spain 0.7 2.6 Spain 1.7 3.1
Israel 0.7 2.3 Belgium 1.7 3.0
Belgium 0.6 2.3 Japan 1.6 3.0
Russia 0.6 2.3 Netherlands 1.6 2.9
Source: IMF, Direction of Trade
Medium- and Long-Term: Outlook
A protracted malaise in the European Union will slow Turkish economic growth in the next several years.
Merchandise exports and capital investment inflows will be subdued in 201214 as Turkeys major partners in Europe dig
out from the current Eurozone debt crisis. Not all forward growth momentum will be lost, however. Turkey has diversified
both its trade and investment partnerships to include more of the Middle East. Thus, a collapse of demand and investment
from the European region does not leave Turkey devoid of activity, although it does severely reduce these levels.
Moreover, as of mid-2012, the central bank seems to have successfully navigated a soft landing for the economy, avoiding
the crash that might have accompanied the correction of the current-account deficit.
After this short-term economic slowdown, however, the Turkish economy remains relatively well equipped for
sustained, strong expansion in the longer term. With a well trained and underutilized labor market, an advantageous
geopolitical location with warming, albeit sporadically, ties with Europe, low interest rates, and an improving bureaucracy,
fixed capital investment growth should recovery relatively robustly in the medium and longer term. Additionally, consumer
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credit penetration is still relatively low in the country, particularly the use of credit cards. The banking sector is stable and
eager to expand consumer credit opportunities, so once the current regional malaise lifts, consumption growth could
revive rapidly. This comparatively strong medium-term outlook for domestic demand has a rather large drawback in that it
will prevent a rapid improvement in the dangerously large current-account deficit. The government will need to do a better
ob attracting more stable foreign direct investment inflows to help financing the sure-to-be large gap through the next
several years. To address the current-account deficit, structural reforms are needed to make the country less import
dependent, while a greater effort to contain domestic demand is needed. The government is promising such reforms, but
much must be done before a meaningful change is noted. For now, financing the current-account deficit is a major risk for
the country, particularly as incoming capital will be diverted in the short and medium term to finance still-large fiscal gaps
and onerous debt-repayment obligations.
Turkey's longer-term economic outlook remains clouded by continuing doubts regarding the country's prospects
of membership in the EU. When the accession process formally began in October 2005, it was widely assumed that the
path would be long and fraught with problems. Final accession was initially widely assumed to come no earlier than 2015.
Nevertheless, even these relatively guarded assessments of the process have proven to be extremely optimistic, as
rumors of potential derailment of the process have persisted in both Brussels and Ankara. Right now, it is unlikely that the
country will actually achieve EU membership for the foreseeable future (certainly not any sooner than 10 years out). In
recent annual reports regarding Turkish accession, the European Commission criticized a lack of movement on several
key reform areas. The 200809 global crisis and ongoing Eurozone crisis only served to derail needed reforms further,
particularly privatization efforts. Moreover, continuing institutional crises within Turkeybetween the government and the
military, between the government and the judiciaryfurther undermine forward momentum, suspending potential progress
in reforms. Although EU-based reports have remained relatively optimistic about both the overall movement toward
accession and the prospects, an impasse over Turkeys refusal to recognize Cyprus has created a significant stumbling
block. Even without the Cyprus issue, doubts from within the EU, particularly France, are growing, potentially forcing an
early ultimatum as to the accession process. It is now increasingly possible that the accession process might be
terminated from either the EU or the Turkish side, as Turkish citizens are growing disaffected from the movement, largely
as a reaction to EU hesitation. If the overall accession process is derailed, the medium-term economic forecast would be
affected. Nevertheless, our baseline expectation is that these negotiations will indeed continue, although not necessarily to
ultimate fruition. In any case, the general push of reforms that we assume will happen to facilitate EU accession will likely
continue, regardless of the official EU prospects for Turkey. If accession is formally off the table, we expect that the
Turkish economy will continue to become integrated with that of the EU. In fact, denial of full membership, which politically
could be severely damaging, may free the Turkish economy somewhat, allowing the country to avoid some of the more
restrictive or burdensome reforms demanded by the EU.
As the economy evolves to become more integrated with the EU, the value-added contribution to GDP will shift
significantly. Services are expected to grow the most rapidly over the medium and longer term, as the countrys tourism
undergoes a radical transformation and evolution. The country is aggressively attempting to de-emphasize agricultural
production, hoping to relocate agrarian workers into higher-technology and higher value-added manufacturing sectors.
The 200809 economic downturn set this process back somewhat, with a loss of industrial employment once again
pushing agricultural employment upwards. Nevertheless, we anticipate that the push towards higher technology will once
again resume, driving down the influence of low-tech sectorsin particular textiles and clothing. Economic development
will center on Istanbul but increasingly push to the east. The countrys position as an energy middleman will continue to
develop, with investment flows heavy in developing new energy pipelines to bring in raw energy products from the East
and to export refined energy products to the West. As such, Ankara has been aggressive in signing deals that deliver
Central Asian gas to European markets.
As discussed previously, the substantial current-account deficit will present severe downside risks to the
country's sovereign debts throughout the short and medium term, only slowly easing in the longer term. Although
the recovery in import demand in the short term will be sharply stronger than the subsequent revival in exportspartly due
to the stronger lirawe nonetheless expect export growth to recover fully further out, contributing to a slow narrowing of
the current-account deficit in the longer term. Nevertheless, given that the deficit will remain fairly large for quite some time
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at 3.0% of GDP or more until around 2025, financing will remain a major threat to Turkish stability. As such, external debt
will remain a constant threat, potentially running up rapidly if investment inflows are ever compromised. Slowly, an influx of
more substantial foreign direct investment inflows should help alleviate the country's reliance on debt financing. These
foreign investment inflows will also help to buoy longer-term economic growth, bringing with them technology transfers that
should help boost the country's productivity levels.
Analyst Contact Details: Andrew Birch
Sovereign Risk - Economic
Surging Gold Exports to Iran Contribute to Sharp Reduction in Turkish Trade Deficit in H11.
01 AUG 2012
Economic
Turkish Leading Production Indicators Support Soft Landing Expectation2.
26 JUL 2012
Economic
Turkish Central Bank Keeps Interest Rates Unchanged But Increases Domestic Liquidity3.
20 JUL 2012
Economic
Turkish Consumers Remain Wary Despite Modest Labour Market Gains4.
17 JUL 2012
Sovereign Risk - Economic
Turkey's Current-Account Deficit Continues to Narrow Sharply, Buoying Domestic Markets5.
12 JUL 2012
Turkey: Country Reports - Recent Analysis
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Economic
Turkish Growth Indicators Continue to Surprise on the Upside Although Budget Data Disappoints6.
10 JUL 2012
Economic - Country
Turkey's GDP Growth Surprisingly Strong in Q17.
03 JUL 2012
Economic
Leading Production Indicators Suggest Significant Turkish Slowdown in Q28.
26 JUN 2012
Economic
Turkish Central Bank Keeps Interest Rates Steady Once Again in June9.
22 JUN 2012
Economic - Sovereign Risk
Moody's Upgrades Turkish Sovereign Risk Rating to One Notch Below Investment Grade10.21 JUN 2012
Created on 02 Aug 2012
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