Turkey

Politics:

• Analysis

  Turkey politics: Quick View - A thaw in Turkish-Israeli relations

  Event

  On March 22nd the Israeli prime minister, Binyamin Netanyahu, issued a formal apology to Turkey's prime minister, Recep Tayyip Erdogan, for the killing of nine Turkish activists in May 2010 when Israeli forces boarded a Turkish aid ship, Mavi Marmara, to prevent it from breaching Israel's naval blockade of the Palestinian-occupied Gaza Strip.

  Analysis

  Mr Netanyahu's official apology, which was brokered by the US, has given a strong boost to Turkey's position in the region and could pave the way for closer co-operation between the two countries. The benefits of improved ties would be considerable for both sides. The need for co-ordination in response to the civil war in Syria, with which both countries have borders, has become increasingly urgent. Turkey faces the threat of retaliation for calling for Syria's president, Bashar al-Assad, to stand down, and for assisting Syrian opposition forces. Turkey and Israel share concerns that a power vacuum in Syria might result in the Assad regime's chemical weapons falling into the hands of Islamic fundamentalists, who are being drawn to the region in growing numbers.

  Another area of co-operation could be the exploration and exploitation of gas in the eastern Mediterranean. Israel has made large offshore gas finds there, while Turkey is a large gas importer, seeking to reduce its dependence on Russian and Iranian supplies, and located at the crossroads of east-west pipeline networks.

  Diplomatic ties between Turkey and Israel have been all but frozen since the Mavi Marmara killings. Mr Erdogan's religiously conservative (pro-Islam) Justice and Development Party (AKP) government, which has been in power since late 2002, was never comfortable with Turkey's long-standing strategic military alliance with Israel. In January 2009, Mr Erdogan walked out of a Gaza discussion with Israel's president, Shimon Peres, at the World Economic Forum in Davos, Switzerland, accusing him of being "good at killing", following Israel's bombardment of Gaza a few months earlier.

  After Mr Netanyahu's apology, Mr Erdogan insisted that normalisation would take some time, although this appears to have been mainly aimed at public opinion in Turkey and Muslim opinion in the wider region. For a further improvement in relations, he says that Israel must satisfy Turkey's other demands regarding the Mavi Marmara crisis, namely adequate compensation for the victims' families and an easing of the Gaza blockade. Already by March 25th, the Turkish foreign minister, Ahmet Davutoglu, and the Israeli justice minister, Tzipi Livni, had begun talks on compensation. Earlier in 2013, Israel had agreed to some easing of the trade restrictions against Gaza. Mr Erdogan has said that he will visit Gaza in the coming months, when he will verify the impact of this easing.

  March 27, 2013

• Background

  Turkey: Key figures

  Recep Tayyip Erdogan

  As mayor of Istanbul in 1994-98, Mr Erdogan won the approval of many voters who did not support his Islamist political attachments. After a brief period in prison, he broke with the leader of the pro-Islamist Welfare Party, Necmettin Erbakan, and launched the Justice and Development Party (AKP), which won the general elections of 2002, 2007 and 2011. His judgment has been questionable on a few issues and he does not take criticism well, which has led to numerous lawsuits against writers and journalists. Overall, however, his governments have had some notable achievements, including the stabilisation of the economy, the start of EU membership negotiations and the gradual removal of the military from politics. Unlikely to be able to run for a fourth parliamentary term, he is expected to seek election as president in 2014, but with enhanced powers, which would allow him to continue to dominate the political scene.

  Abdullah Gul

  As deputy leader of the AKP, Mr Gul served as prime minister while Mr Erdogan was excluded from parliament between November 2002 and March 2003, after which he became deputy prime minister and minister of foreign affairs. In August 2007 he was elected by parliament as president. Secularists strongly resisted his election because of his pro-Islamist past. But he has performed well as president, especially on foreign-policy issues. He is strongly in favour of Turkey's EU membership bid and respected in EU circles. Mr Gul has long been a close ally and friend of Mr Erdogan, but they are also political rivals. He could run against Mr Erdogan at the next presidential election, although the Economist Intelligence Unit believes that to be unlikely. As president, Mr Gul may challenge the prime minister if the latter seeks to introduce a presidency with executive powers.

  Kemal Kilicdaroglu

  Mr Kilicdaroglu replaced the long-standing chairman of the main opposition Republican People's Party (CHP), Deniz Baykal, in May 2010. He is a relatively inexperienced but respected politician with a reputation for taking a tough line on corruption. As a career bureaucrat who has served in numerous government agencies, he was only elected to parliament on the CHP ticket in 2007. A less divisive figure than Mr Baykal, he has managed to attract some liberal left-wing politicians back to the CHP by overhauling party policy on key issues such as the Kurdish problem and the role of the military. However, he lacks charisma and failed to pose a real threat to Mr Erdogan at the June 2011 election.

  Devlet Bahceli

  Mr Bahceli has been leader of the opposition Nationalist Action Party (MHP) since 1997 after the death of its founder, Colonel Alparslan Turkes. While a junior partner in a broad left-right coalition government between 1999 and 2002, Mr Bahceli showed willingness to compromise on some sensitive issues as he tried to move the party from the extreme right to the right-of-centre. The transition appears to have been reversed since the party went back into opposition in 2002, especially on the Kurdish issue. Mr Bahceli and his party are strongly opposed to legislation that they consider to be a political concession to the Kurds.

  General Necdet Ozel

  General Necdet Ozel was appointed chief of the general staff at the beginning of August 2011, two years earlier than originally planned, following the unexpected resignation of his predecessor, General Isik Kosaner, and other top commanders over the prosecution of about 40 generals and admirals on charges of plotting to bring down the government. During his career, General Ozel has eschewed involvement in political wranglings between the military and the civilian authorities. His dealings with the government have been much less confrontational than those of some of his predecessors and under his command the military has generally maintained a lower public profile, in keeping with reforms that have brought the Turkish Armed Forces increasingly under civilian control.

  September 11, 2012

• Structure

  Turkey: Political structure

  Official name

  Republic of Turkey

  Form of state

  Parliamentary republic

  Legal system

  Based on European models and constitution of 1982

  National legislature

  Unicameral Meclis (parliament) of 550 members directly elected for a four-year term

  Electoral system

  Universal direct suffrage over the age of 18. Only parties with more than 10% of the national vote are eligible for seats in parliament. Individuals may run as independents

  National elections

  Last parliamentary election June 12th 2011; next parliamentary election by June 2015. Next presidential election August 2014

  Head of state

  The current president, Abdullah Gul, was elected by parliament for a single seven-year term in August 2007; the next presidential election will be by universal direct suffrage; the next president will serve a maximum of two consecutive five-year terms

  National government

  The present government is formed by the Justice and Development Party (AKP)

  Main political parties

  Islamist-liberal: Justice and Development Party (AKP); Islamist: Prosperity Party (Saadet, SP); centre-left: Republican People's Party (CHP) and Democratic Left Party (DSP); nationalist right: Nationalist Action Party (MHP); pro-Kurdish: Peace and Democracy Party (BDP). In the 2011 election the AKP, CHP and MHP exceeded the 10% national vote threshold. Members of the BDP were elected as independents

  Council of Ministers

  Prime minister: Recep Tayyip Erdogan

  Deputy prime ministers:

   Bulent Arinc

   Besir Atalay

   Ali Babacan

   Bekir Bozdag

  Key ministers

  Agriculture, food & animal resources: Mehmet Mehdi Eker

  Culture & tourism: Omer Celik

  Defence: Ismet Yilmaz

  Development: Cevdet Yilmaz

  Economy: Zafer Caglayan

  Education: Nabi Avci

  Employment & social security: Faruk Celik

  Energy & natural resources: Taner Yildiz

  Environment & urban planning: Erdogan Bayraktar

  EU affairs: Egemen Bagis

  Family & social policy: Fatma Sahin

  Finance: Mehmet Simsek

  Foreign affairs: Ahmet Davutoglu

  Forestry & water: Veysel Eroglu

  Health: Mehmet Muezzinoglu

  Interior: Muammer Guler

  Justice: Sadullah Ergin

  Science, technology & industry: Nihat Ergun

  Sport & youth: Suat Kilic

  Tourism & culture: Ertugrul Gunay

  Trade & customs: Hayati Yazici

  Transport: Binali Yildirim

  Central Bank governor

  Erdem Basci

  March 19, 2013

• Outlook

  Turkey: Key developments

  Outlook for 2013-17

  • The Economist Intelligence Unit expects the Justice and Development Party government to continue in office until the next election in mid-2015 and probably beyond. The political scene is likely to remain highly polarised.
  • The government's main challenges are introducing a new civilian-friendly constitution; ending the conflict with the outlawed Kurdistan Workers' Party (PKK) and resolving the Kurdish issue; and avoiding war with Syria.
  • The prime minister, Recep Tayyip Erdogan, is keen to enhance the powers of the presidency before Turkey's first direct presidential election in 2014. If he runs for the post, we expect him to be elected.
  • The budget deficit rose to about 2% of GDP in 2012. In 2013-14 we forecast a further rise to 2.5-3% of GDP (owing to elections in 2014-15), before it eases gradually to about 2% of GDP in 2016-17.
  • We expect the Central Bank of Turkey to keep its main interest rate-the one-week repo (repurchase) lending rate-low (currently 5.5%). However, it will retain the flexibility to alter the level and cost of its funding to the banking system.
  • Annual GDP growth slowed from 8.6% in 2011 to an estimated 2.7% in 2012. We expect a gradual pick-up to 3.8% in 2013 and just over 5% a year in 2014-17.
  • The current-account deficit eased in 2012, but we expect it to increase again from 2013 and to remain worryingly large, reflecting Turkey's heavy dependence on imported oil and intermediates.

  Review

  • The government has put pressure on the all-party Constitutional Reconciliation Commission in parliament to agree on a new draft constitution by the revised deadline of end-April 2013.
  • The government's constitutional reform drive has become entangled with its peace talks with the PKK as Mr Erdogan seeks Kurdish support in parliament to introduce a presidential system.
  • On February 19th the Central Bank of Turkey left its main policy rate, the one-week repo lending rate, unchanged at 5.5%, but cut its overnight lending and borrowing rates by 25 basis points, to 8.5% and 4.5%, respectively.
  • Industrial output (seasonally and calendar-year adjusted) rose by 2.3% month on month in January, following a monthly fall of 3.5% in December 2012.
  • The jobless rate eased to an average of 9.2% in 2012, from 9.8% in 2011. In the fourth quarter the rate rose to 9.4%, compared with 8.8% in the third.
  • Turkey's current-account deficit amounted to US$5.6bn in January 2013, compared with US$5.7bn in January 2012.

  March 19, 2013

Economy:

• Background

  Turkey: Country fact sheet

  Fact sheet

  Annual data	2012a	Historical averages (%)	2008-12
  Population (m)	74.7	Population growth	1.0
  GDP (US$ bn; market exchange rate)	804	Real GDP growth	3.1
  GDP (US$ bn; purchasing power parity)	1,126	Real domestic demand growth	2.5
  GDP per head (US$; market exchange rate)	10,761	Inflation	8.1
  GDP per head (US$; purchasing power parity)	15,066	Current-account balance (% of GDP)	-6.0
  Exchange rate (av) TL:US$	1.80b	FDI inflows (% of GDP)	2.0
  a The Economist Intelligence Unit estimates. b Actual.

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  Background: The Turkish Republic was formed in 1923. Nationalist resistance forces led by Mustafa Kemal (Ataturk) defeated the occupying allies after the first world war to establish the country's current borders. Turkey oriented its political and economic structure towards the West, becoming a member of the Council of Europe (1949) and of NATO (1952) and signing an association agreement with the then European Community (1963). A customs union with the EU took effect in 1996. EU accession negotiations were opened in October 2005, but have made slow progress.

  Political structure: Turkey is a secular democratic state governed under the 1982 constitution. There have been three periods of military rule: in 1960-61, 1971-73 and 1980-83. The military's role in Turkish politics has been gradually curtailed. Parties need at least 10% of the national vote to win any parliamentary seats, but candidates can run as independents. The parliamentary term was cut from five years to four in October 2007. Parliament elected the current president, Abdullah Gul, in August 2007; his successor will be directly elected, with the poll scheduled for August 2014. Executive power will remain with the prime minister, unless this is changed in the constitution. The religiously conservative, pro-EU Justice and Development Party, led by the prime minister, Recep Tayyip Erdogan, won a third term in office at the general election in June 2011.

  Policy issues: IMF-backed reforms after the 2001 crisis reduced macroeconomic instability. Without an IMF stand-by accord since May 2008, Turkey's fiscal policy has remained prudent. Large external financing needs leave the economy vulnerable to sharp changes in investor sentiment. Increasing employment and reducing income inequality are key policy concerns. Resolving the Kurdish problem, which has blocked economic development in the south-east of the country, is arguably the most pressing political issue, but nationalist resistance to improving minority rights is still strong.

  Taxation: The basic rate of corporation tax is 20%. Personal income tax rates range between 15% and 35%. Tax reform to reduce tax evasion was one of the main elements of previous IMF reform programmes, but tax compliance remains weak.

  Foreign trade: In 2012 exports (fob) amounted to US$163.3bn, while imports (fob) were US$228.9bn, leaving a trade deficit of US$65.6bn, compared with US$89.5bn in 2011. The export figures include estimates of earnings from "suitcase trade".

  Major exports 2011	% of total	Major imports 2011	% of total
  Textiles & clothing	18.2	Fuel	14.3
  Iron & steel	12.7	Chemicals	13.8
  Transport equipment	12.6	Machinery	8.8
  Agro-industry	10.4	Transport equipment	8.3
  Leading markets 2011	% of total	Leading suppliers 2011	% of total
  Germany	10.3	Russia	9.9
  Iraq	6.2	Germany	9.5
  UK	6.0	China	9.0
  Italy	5.8	US	6.7

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  March 19, 2013

• Structure

  Turkey: Economic structure

  Data and charts: Annual trends charts

  
  

  

  March 19, 2013

• Outlook

  Turkey: Country outlook

  Turkey: Country outlook

  FROM THE ECONOMIST INTELLIGENCE UNIT

  POLITICAL STABILITY: The Economist Intelligence Unit expects the religiously conservative Justice and Development Party (AKP) to remain in government until the next general election, which is due in mid-2015, and probably beyond. The opposition in parliament is fragmented and largely ineffective and the prime minister, Recep Tayyip Erdogan, has a strong hold on his party and the government, which has greatly reduced the influence of hardline secularist/nationalist forces in the military and the judiciary. The concentration of power in Mr Erdogan's hands and the suspicion with which he is viewed by his political opponents have led to high levels of polarisation in the political system. We expect Mr Erdogan to stand down as AKP leader and prime minister in order to run for president in 2014. The current president, Abdullah Gul, a co-founder of the AKP and a former deputy prime minister, would probably return as party leader. However, much of this scenario will depend on whether Turkey adopts a new constitution, as promised, and whether it will enhance the powers of the president, as Mr Erdogan and his supporters hope.

  ELECTION WATCH: The next general election is not due until mid-2015. The AKP currently appears to have no serious challengers, although a change in the AKP leadership from 2014 could undermine party cohesion. Local elections will take place no later than March 2014, and the first direct election of the head of state is scheduled for August 2014. A referendum on a new constitution could take place before then, but this is highly uncertain.

  INTERNATIONAL RELATIONS: Developments in the Arab world, notably in war-torn Syria, have made foreign policy difficult. We believe that increased instability on its south-eastern border will reinforce Turkey's traditionally Western orientation, despite government efforts to maintain a degree of independence from Western positions, and establish Turkey as the dominant power in the eastern Mediterranean. Having previously enjoyed positive relations with Syria, the Erdogan government has repeatedly urged its president, Bashar al-Assad, to stand down. Turkey has provided logistical support for the Syrian opposition and also a safe haven for it and for the tens of thousands of Syrian refugees fleeing the violence. Because of the perceived risk to Turkey of missile attacks from Syria, NATO (of which Turkey is a member) has deployed air-defence missiles in the south-east of the country. We believe that a war will be avoided. It would be in neither Turkey's nor Syria's interests and would risk drawing into the conflict Turkey's Western allies, which are reluctant to get involved in another military intervention after the one in Libya in 2011. The civil war in Syria will continue to frustrate Turkey's efforts to clamp down on the PKK as Syrian Kurdish groups affiliated to it have taken control of towns in northern Syria, near the Turkish border. Turkish efforts to maintain positive ties with Iran and Russia--two of its main energy suppliers, but also close allies of Syria--will continue to suffer.

  POLICY TRENDS: Macroeconomic stability is expected to remain vulnerable to sudden shifts in international investor sentiment, given Turkey's large external financing needs and the debt crisis in the euro zone (its main goods export market and a major source of capital). Although a series of elections in 2014-15 could prompt more populist tendencies in economic policymaking, we expect the government generally to tailor policies to maintain an open, largely market-driven economy with adequately prudent management of the public finances, a floating exchange rate, inflation targeting (albeit less stringent than in the past) and a well-regulated financial sector. Progress is also expected in the medium term on reducing labour market rigidities and on measures to support job creation. Efforts to boost the proportion of revenue from direct taxes rather than indirect taxation are likely to make slow progress, however, given widespread evasion.

  ECONOMIC GROWTH: Real GDP growth decelerated sharply in 2012, reflecting the high baseline in 2010 and early 2011; weaker global economic conditions, especially in the crisis-hit euro area, Turkey's main export market; and monetary policy tightening to reverse a sharp fall in the value of the lira in late 2011-early 2012. Assuming that cautious monetary loosening by the Central Bank during part of 2012 and early 2013 revives domestic credit growth and that a moderate improvement in global financial and economic conditions in 2013 is not reversed, we expect Turkish real GDP growth to accelerate from an estimated 2.7% in 2012 to 3.8% in 2013 and about 5% a year during 2014-17.

  INFLATION: Despite sharp increases in indirect taxes and administered prices to shore up the public finances in late 2012, consumer price inflation eased to a lower than expected 6.2% in December. We believe that a renewed acceleration to 7.3% in January 2013 will prove temporary (inflation eased to 7% in February) and that inflation will gradually decline during this year. In 2013-14 we expect inflation to average 6.5-7% a year as we are forecasting only a gradual pick-up in consumer demand growth, continued currency stability and flat or even falling international commodity prices. We forecast consumer price inflation of 6.6% at end-2013 and 6.3% at end-2014, compared with a Central Bank target ((2 percentage points) of 5% for both years. During 2015-17 we expect inflation to ease towards 4%, as we expect the inflationary effects of higher global oil prices and stronger aggregate demand to be offset by the impact of higher domestic interest rates and a stable lira.

  EXCHANGE RATES: There are substantial upside and downside risks to our exchange-rate forecasts arising from uncertainty over the outlook for global financial flows. Our baseline forecast is that the currency will remain relatively stable in nominal terms against the US dollar, averaging about TL1.80-1.90:US$1 in 2013-17, supported by relatively tight monetary policy, a narrower current-account deficit (compared with 2011) and capital inflows that cover Turkey's external financing needs. Against the euro, the lira is expected to average around TL2.30-2.50:EUR1 during the forecast period.

  EXTERNAL SECTOR: The current-account deficit fell from a record 10% of GDP in 2011 to an estimated 6.1% of GDP in 2012, owing to slower domestic demand and a weaker lira. We expect it to increase again and remain large enough to be a potential source of financial instability in 2013-17. The effects of prolonged fiscal tightening in the EU, Turkey's largest market, are likely to continue to curb demand growth for exports of goods and services. However, export growth to non-EU countries has been strong since early 2012, boosted by a more competitive lira and export market diversification, but also by an unsustainable surge in gold exports--either directly or via third countries--to Iran as payment for Turkey's oil and gas imports.

  March 25, 2013

• Forecast

  Turkey: Country forecast summary

  Country forecast overview: Highlights

  • The Economist Intelligence Unit expects the religiously conservative Justice and Development Party (AKP) to remain in office until the next general election in 2015 and probably beyond. Having led the AKP to a third consecutive election victory in 2011, winning almost 50% of the votes cast, the prime minister, Recep Tayyip Erdogan, has strengthened his hold on his party and the government.

  • The issue of constitutional reform will keep tensions high between the AKP and the secularist/nationalist camp, including the main opposition Republican People's Party. As part of the process of drafting a new constitution, Mr Erdogan
  • is seeking to enhance the powers of the presidency and is then expected to run for the post in 2014. The AKP's parliamentary majority falls just short of the minimum required for changes to the constitution (a three-fifths majority plus a referendum). Opposition parties appear suspicious of such radical change, but support from one party or a group of defectors cannot be ruled out.
  • The Kurdish issue will remain a major source of instability and, along with the division of Cyprus, an obstacle to progress in Turkey's EU accession talks. There is opposition to the government's direct peace talks with the jailed leader of the outlawed Kurdistan Workers' Party (PKK) among members of the PKK and hardline Turkish nationalists, leaving little room for hope of a peaceful solution. The risk of major military confrontation with war-torn Syria has risen, but we believe that a further escalation will be avoided by both sides.
  • We estimate that the budget deficit/GDP ratio rose from 1.4% in 2011 to 2% in 2012, owing to weaker economic growth and diminishing one-off revenue streams. We expect it to rise to about 2.5-3% in 2013-15, owing to elections due in 2014 and 2015, before easing to about 2% in 2016-17. Real GDP growth slowed from an average of about 9% a year in 2010-11 to an estimated 2.7% in 2012. We expect a gradual pick-up to growth of 3.8% in 2013 and about 5% a year in 2014-17.
  • Inflation eased towards the end of 2012, to 6.2% in December. We expect that the renewed acceleration to 7.3% in January 2013 will prove temporary and that inflation will ease gradually this year. Moderate economic growth, a more stable Turkish lira and moderately tighter monetary policy from late 2013/early 2014 should help to bring down inflation to around 4% by the end of 2017.
  • The current-account deficit narrowed from a record 10% of GDP in 2011 to an estimated 6.1% of GDP in 2012. We expect it to rise again to an annual average of about 7% of GDP in 2013-17, a high enough level to leave the Turkish economy vulnerable if there is a renewed deterioration in global financial conditions.

  

  March 19, 2013

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Country Briefing

Land area

783,562 sq km (including lakes and islands), of which 30% arable, 3% orchards, olive groves and vineyards, 26% classified as forest

Population

74,724,269 (end-2011 estimate, Turkstat)

Main towns

Population (end-2011):

Istanbul: 13,624,240

Ankara (capital): 4,890,893

Izmir: 3,965,232

Bursa: 2,652,126

Adana: 2,108,805

Climate

Mediterranean on the south coast, continental inland

Weather in Ankara (altitude 861 metres)

Hottest month, August, 15-31°C (average daily minimum and maximum); coldest month, January, -4-4°C; driest month, August, 10 mm average rainfall; wettest month, December, 48 mm average rainfall

Language

Turkish

Measures

Metric system

Currency

Turkish lira

Time

2 hours ahead of GMT; 3 hours ahead in summer

Fiscal year

Calendar year

Public holidays

January 1st; April 23rd; May 19th; three days for Ramadan and four days for Kurban or Eid (dates vary according to the Muslim calendar); August 30th; October 28th (half-day); October 29th

January 17, 2013