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Corporate Network Turkey: the business outlook For members of the East European Group March 2009 Contents • Executive summary • Business outlook • Economic outlook • Political outlook • Economic statistics and forecasts • Market size indicators Executive summary • Turkey is already feeling the impact of a deep recession • Which will likely last through 2010 and will only subside when developed economies begin to recover • The lira has seen a steep depreciation, and could fall further until a deal with the IMF is in place • Government officials are currently negotiating such a deal, which will likely be worth more than $25bn • Nearly a third of respondents to our latest survey say they still expect sales to grow this year… • …which is overly optimistic given the current climate Business outlook – performance benchmarking • The business outlook in Turkey is grim, though not the worst in the region • 32% of firms expect sales to drop this year, and an equal percentage say sales will grow • But the median of sales growth forecasts is 0% • A majority (58%) of firms have experienced more difficulty collecting receivables in the past three months • Cost cuts will be relatively modest, given the current economic turmoil: just over quarter of firms say they will trim advertising expenditures • And only a handful have plans to lay-off white collar staff or delay manufacturing investments Business outlook – performance benchmarking • Industrial and healthcare and pharmaceutical firms are the most optimistic about 2009 – a third of firms in both sectors expect that sales to grow • But only 17% of industrial firms expect sales to fall, compared to 33% of healthcare and pharma companies • 25% of financial services firms forecast growth, and an equal percentage expect sale to drop • FMCG firms are more pessimistic: 50% expect sales to drop and only 17% expect growth Economic outlook – growth outlook • Growth in Turkey has disappeared, like in the rest of the world • Demand for exports, credit squeeze, rebalancing of corporate balance sheets, decline in currency value and overall business confidence, and large payments to creditors are all dragging growth down • Turkey will most likely end up in a recession in both 2009 and 2010 • Turkey will not be able to recover “on its own” • Its dependency on foreign demand and foreign cash is sizeable • Turkey will be able to recover only when there is recovery in its main export markets Economic outlook – currency (1) • The main problems for the lira are: – sizeable payments due in 2009 that exceed forex reserves – large inflows of speculative hot money that leaves when times are bad – delays and uncertainty regarding the IMF stand-by agreement – a history of currency volatility and too much strength gained when global economy was good Economic outlook – currency (2) • With all these factors in play, the lira lost significant value and the risks in the short term are still on the downside • The currency should show signs of relative stability once the IMF deal (which is necessary) is in place • If the government decides to go without the IMF, there will be more currency weakness and on-going problems to finance the large payments in 2009 and 2010 Economic outlook – external sector • The Turkish government has improved a number of fundamentals since it has been in power • But Turkey still carries sizeable debt repayments from previous years and such payments will be sizeable in the next few years • In other words, Turkey still needs time to grow out of its old debt problem • Also, short-term debt payments in 2009 and 2010 are high relative to the size of reserves • The IMF deal, if it is signed soon, will probably exceed $25bn Political outlook • The Constitutional Court's decision in 2008 not to close the ruling Justice and Development Party (AKP) removed only some political uncertainty • An ongoing investigation of an ultranationalist gang, comprised of high-ranking military officials, accused of trying to bring down the government, could damage fragile relations between the government and military • And the government has left itself open to criticism for making only limited progress in key policy areas... • ...including on reforms required for EU membership, which appear to have been put on hold until after the local elections, scheduled to take place later this month Key economic indicators 2009 2010 -2.5% to -4.5% 0.0% to -2.0% -3 -2.7 7.8 7.4 Exchange rate LCU:euro (end-period) 2.50 2.60 Money market interest rate (%) 13.5 13 11 11.6 -3.4 -3.6 Financing requirement (US$bn) -115.5 -113.59 Current account balance (US$bn) -20.14 -24.41 Medium- & long-term repayments due (US$bn) -50.73 -52.27 Short-term debt due (US$bn) -44.62 -36.9 60.65 60.75 46.4 42.6 220.02 222.04 40.3 39.6 GDP (% real change pa) Budget balance (% of GDP) Consumer prices (% change pa; av) Recorded unemployment (%) Current account balance/GDP Foreign-exchange reserves (US$bn) Total debt/GDP (%) Total medium- & long-term debt (US$bn) Public debt (% of GDP) These slides and others in the series provide a range of estimates on GDP outlook. We feel that a scenario/range is the only sensible way forward in planning for these and other markets globally. However, we would underscore that we sense that the risk is always on the downside of the range we provide. Market size indicators 2009 2013 Population (million) 72.61 75.38 Nominal GDP (US$bn) 931.0 1158.1 12,820 15,360 Private consumption per head (US$) 6,030 9,250 Total imports (US$bn) 150.3 217.5 Private consumption (% of GDP) 72.9 71.9 Government consumption (% of GDP) 13.7 14.1 Gross fixed investment (% of GDP) 18.1 16.7 GDP per head (US$ at PPP) Corporate Network is the Economist Intelligence Unit's exclusive, membership-based senior executive briefing and networking service. Independent, thought provoking, and opinion-leading, Corporate Network is led by experts who share a profound knowledge and understanding of business issues. It has regional business groups in Central and Eastern Europe, Middle East & Africa, and Asia Pacific. Economist Intelligence Unit Corporate Network Oelzeltgasse 3/7 1030 Vienna, Austria Telephone: (43 1) 712 41 61 40 Fax: (43 1) 714 67 69 www. corporatenetwork.com Copyright © 2009 The Economist Intelligence Unit Limited. All rights reserved. Neither this publication nor any part of it may be reproduced, stored in a retrieval system, or transmitted in any form or by any means, electronic, mechanical, photocopying, recording or otherwise, without prior permission of The Economist Intelligence Unit Limited. All information in this report is verified to the best of the author's and the publisher's ability. However, the Economist Intelligence Unit does not accept responsibility for any loss arising from reliance on it. Some of the opinions and concepts in this paper are those of the author and are not necessarily identical with those of the Economist Intelligence Unit.