Turkey: Country Economic Forecast: 20 Oct 2010

Though severely hit by the global crisis - not surprising given its dependence on external financing - Turkey has recovered rapidly; GDP in 2010Q2 was 1.9% higher than two years earlier, nearly as fast a rebound as those seen in the small to mid-size emerging Asian economies. The combination of a very stimulative monetary policy, a relatively sound banking sector and high levels of business confidence about the country's long-term outlook has helped drive the bounce-back. The strong performance in H1 (up over 10% year-on-year) may result in GDP growth of 8% in 2010 as a whole, even assuming slower quarterly growth in H2 - dampened by the weak prospects for the country's key export market, the EU. But provided the global situation does not deteriorate, Turkey is well placed - via its structural fundamentals - to experience robust growth in the medium term. However, there are downside risks. One danger is that the central bank keeps interest rates at too low a level for too long, which would endanger economic stability by encouraging too rapid a build-up in bank credit and widening the already considerable current account deficit (the result of the strong recovery in domestic demand, a relatively uncompetitive currency and rising imported energy costs). In this situation, the positive view that the markets currently hold of Turkey could reverse quickly, forcing a disruptive tightening. If the economy remains robust, we would expect the bank to become more worried about these risks in early 2011.