KFH Research Turkey Focus 2012 A Strained Year

Turkey Focus: 2012: A Strained Year Executive Summary
2012 Growth Forecast: Following rising uncertainties in the market, the economic growth prospects for 2012 are expected to be slower. From an estimated 7.5% in 2011, real GDP growth is expected to grow by 4.0% (official projection) in 2012 because of a high baseline, a weak global economy and the impact of the recent market turmoil on the Turkish lira and on consumer and investor confidence. Risks to growth projections would skew to the downside as further bouts of global financial uncertainty and risk aversion are likely to occur, especially in the euro-zone. Inflation Outlook: The Central Bank of Turkey (CBT) forecasts inflation to average at 6.5% in 2012, the same rate as in 2011 (our projection: 7.0%). Consumer prices is expected to remain in double-digits until May 2012 before declining in the second half of the year on the back of favourable base effects. Furthermore, the tight monetary policy stance implemented by the central bank since October 2011 is expected to contain the second round effects, and thus inflation is expected to follow a downward trend as the accumulated effects of the temporary price movements on annual inflation fade away gradually. The CBTs forecast is based on assumption that oil prices will average at USD110 per barrel this year. Monetary Policy Outlook: CBT is expected to continue to vary the level of its funding at the policy rate and to make active use of the overnight corridor, as well as intervening in foreign-exchange markets. An increase in main policy rate (one-week repo rate) is unlikely, despite rising inflationary pressures. As long as inflation expectations remain well-contained, the CBT is expected to remain dovish and will look to ease the policy mix to support domestic growth. Fiscal Outlook: For 2012, we forecast that Turkeys budget deficit to be at relatively modest at 1.5% of GDP (TRY21.1bln) on expectation of moderate economic growth and the diminishing impact of temporary revenue streams. Government expenditure is expected to rise by 12.0% to TRY350.9bln, while total revenue is projected to increase by 11.5% to TRY329.8bn over the same period. Challenges: Turkeys current account deficit remains one of the governments greatest economic challenges. According to the Medium Term Economic Plan (MTP) 2011 2014, current account deficit is expected to narrow to USD65.4bln in 2012 from USD77.1bln deficit (-10.1% of estimated GDP) recorded in 2011. Currency Outlook: Concern about Turkeys large current-account deficit will continue to weigh on the lira and the scope for more large-scale intervention by the CBT is limited, given that Turkeys foreign currency reserves are low relative to its large external financing requirement. Banking Sector Outlook: Turkeys loan growth is anticipated to grow between 12.0% and 16.0% in 2012 (2011: 29.9%), considering the measures put in place by the authorities since 2H10 to curb excessive capital inflows as well as maintain sustainable loan growth. In the longer-term, credit growth will be supported by the still moderate market penetration, favourable demographics and the social mobility potential of its population. Participation Banking Outlook: The participation banking sector is expected to grow by 25%-28% in 2012 (2011E: 32.7%) to reach a potential TRY70bln in total assets, mainly due to continued demand in all financing segments, notwithstanding the recent highs in profit rates. We also expect to see 20% deposit growth in 2012 for the participation banks with consumption decreasing during the year which should support savings growth. Real Estate Outlook: One of the challenges in Turkey real estate sector is to track the prime yield as there are limited office transactions in Turkey, all of which have been in Istanbul. This is due in general to a lack of supply but also as a consequence of the fragmented ownership of the office space in Turkey. Consensus opines that as the supply of good quality office stock increases, the market will see greater investment activity in this sector.
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Turkey Focus: 2012: A Strained Year Executive Summary

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2012 KFH Research Ltd. All rights reserved.

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