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Turkey Country Risk Report Q2 2016

Turkey Country Risk Report Q2 2016

Core Views Relative to the past decade, we expect slower, more balanced growth in the next decade on the back of less abundant foreign capital inflows and slower domestic credit growth. Turkey faces a challenging foreign policy environment amidst heightened regional tensions and rising external security risks as the government attempts to cement its role as an economic and political power in the region. With the Justice and Development Party (AKP) regaining its parliamentary majority in the November 2015 general election, Turkey will operate under a de facto executive presidential system, with negative implications for institutional quality and government checks and balances. A collapse of the government's ceasefire with the Kurdish separatist PKK is a major step back for the country, weighing on growth potential. While the government's debt load is low by regional standards, the private sector's rampant external borrowing in previous years has greatly increased macroeconomic risks. Despite cheaper oil, Turkey's current account deficit will remain large and a major macroeconomic vulnerability. Turkey will remain reliant on short-term foreign capital inflows to cover the sizeable current account shortfall, leaving it prone to tightening global liquidity and shifts in international risk sentiment. A dovish central bank will keep inflation above target and ensure a volatile growth trajectory.


Executive Summary
Core Views
Key Risks
Chapter 1: Economic Outlook
SWOT Analysis
BMI Economic Risk Index
Economic Growth Outlook
Multiple Headwinds Weighing On Growth
Geopolitical risks, weak external demand, lira depreciation and private sector deleveraging will weigh on Turkey's growth potential in the
coming quarters. We forecast below-consensus real GDP growth of 2.9% and 3.2% in 2016 and 2017 respectively.
GDP By Expenditure Outlook
TABLE: GDP GROWTH FORECASTS
TABLE: PRIVATE CONSUMPTION FORECASTS
TABLE: GOVERNMENT CONSUMPTION FORECASTS
TABLE: FIXED INVESTMENT FORECASTS
TABLE: NET EXPORTS FORECASTS
Monetary Policy
Inflation Fighting Credibility Waning Further
The Central Bank of Turkey will maintain its dovish stance in the face of ongoing government pressure to support growth, keeping
inflation well above target levels both this year and next.
Monetary Policy Framework
External Trade And Investment Outlook
Despite Improvement, Current Account Still Major Risk
Turkey's current account rebalancing will run its course in 2016 as oil prices bottom, with the deficit remaining one of the largest among
major emerging economies at just under 5.0% of GDP.
Outlook On External Position
TABLE: TOP 5 GOODS EXPORTS & IMPORTS IN 2015
TABLE: CAPITAL & FINANCIAL ACCOUNT BALANCE
Fiscal And Debt Outlook
Spending Pledges To Drive Deficit, Yields Higher
Higher spending commitments following the 2015 general election, and overly optimistic official growth forecasts will see Turkey's
budget deficit widen to 2.1% and 2.0% of GDP in 2016 and 2017 respectively.
Structural Fiscal Position
TABLE: MAIN REVENUE & EXPENDITURE CATEGORIES
Currency Forecast
TRY: More Depreciation Ahead Amid Loose Monetary Policy, Political Risks
While we expect broad-based US dollar strength to taper out in 2016, the Turkish lira will remain on a depreciatory path in the coming
year due to loose monetary policy, elevated political risks and still-wide external deficits.
TABLE: BMI CURRENCY FORECAST
Chapter 2: 10-Year Forecast
The Turkish Economy To 2025
Shine Coming Off Growth Story
Turkey will remain on a volatile growth trajectory, with average real growth rates slowing to 3.2% in the next decade, from 5.0% in 2003-
2013. Although the size of the domestic market and its strategic location will remain key selling points for foreign investors, weighing
down on potential growth will be high operational risks, weakening institutional quality and persistent macroeconomic imbalances.
TABLE: LONG-TERM MACROECONOMIC FORECASTS
Chapter 3: Political Outlook
SWOT Analysis
BMI Political Risk Index
Domestic Politics
Domestic And Foreign Policy Risks Rapidly Rising
Russia's intervention in Syria has dealt a devastating blow to Turkey's foreign policy goals and raised the risk of a military confrontation
between the two states. On the domestic front, violence between the Turkish government and the PKK shows no signs of abating
and we see growing risks of fresh elections as President Recep Tayyip Erdogan seeks to bolster his party's majority and pursue
constitutional reforms to strengthen the power of the executive office.
TABLE: POLITICAL OVERVIEW
Scenario: Turkey-Russia Clash In Syria
The possibility of a major military clash between Turkey and Russia in Syria is increasing, as both countries bolster their proxy forces.
The Bosphorous and Dardanelles also constitute potential flashpoints, if Turkey were to block Russian shipping through the Straits.
Direct confrontation between Ankara and Moscow would raise the prospect of NATO intervention, substantially elevating the dangers of
the Syrian conflict.
Long-Term Political Outlook
Structural Changes To Continue
Turkey's moderate Islamist Justice and Development Party will continue to press ahead with divisive reforms to the country's political
and social system for the foreseeable future, and risks creating an increasingly and unsustainably polarised society. In terms of foreign
policy, we expect Turkey to continue rebalancing its interests away from the West.
Chapter 4: Operational Risk
SWOT Analysis
Operational Risk Index
Operational Risk
TABLE: OPERATIONAL RISK
Trade Procedures And Governance
TABLE: EMERGING EUROPE – TRADE PROCEDURES AND GOVERNANCE RISK
TABLE: EXPORT AND IMPORT DOCUMENTS
TABLE: TRADE PROCEDURES BREAKDOWN
Vulnerability To Crime
Chapter 5: BMI Global Macro Outlook
Global Macro Outlook
Tail Risks Mounting Amid Sub-Par Growth
TABLE: GLOBAL ASSUMPTIONS
TABLE: DEVELOPED STATES, REAL GDP GROWTH, %
TABLE: BMI VERSUS BLOOMBERG CONSENSUS REAL GDP GROWTH FORECASTS, 2015 AND 2016 (%)
TABLE: EMERGING MARKETS, REAL GDP GROWTH, %
TABLE: MACROECONOMIC DATA & FORECASTS

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