Bank Audi, December 10, 2012: TURKEY ECONOMIC REPORT

• Turkish economy slowing down from overheating phase
The 3.0% 2012 growth forecasted by the IMF for Turkey is considered healthy in the current atypical global environment and bearing in mind the important domestic economic accomplishments of the past years. Household consumption is decelerating as spending reverts to more normal levels following a credit-driven boom. In parallel, after rebounding in 2010-2011, gross fixed investment growth is slightly slowing down in 2012 owing to base effects and softer demand growth.

• Spillovers of a sluggish global environment and challenges in neighbouring countries
On one hand, a wide fiscal driven distress is impacting the neighbouring European countries and on the other hand, a regional politico-security turmoil is adversely affecting the neighbouring Arab countries. The impact of the deterioration of the European debt crisis on Turkey is evident. Turkey's largest trading partner is the EU, accounting for 42% of its exports and dominating investment flows as well at a current circa 78% of total FDI in Turkey. With respect to the Syrian turmoil, Turkey is one of the most serious countries to abide by the economic sanctions against Syria, even at the detriment of considerable bilateral trade and investment flows.

• External vulnerabilities somehow eased by economic soft landing and shift in export markets
The country's external accounts benefitted on one hand from the weaker imports due to the tighter monetary and macro-prudential policies implemented in 2011, and on the other hand from the steady exports owed to a successful diversification of markets coupled with higher gold sales. Consequently, the shortfalls of the foreign trade balance and the current account contracted by 27.9% and 35.0% year-on-year during the first nine months of 2012, respectively. Turkey's exports rose by 13.6% and imports went down by 2.6% year-on-year over the period.

• Fiscal accounts set to exceed budgeted figures but remain sound
Besides the slowdown in revenues reflecting a weaker growth, expenditure increases above the budget ceilings contributed to a worsening of the fiscal shortfall this year. As a matter of fact, IMF forecasts showed that revenues are set to widen at a much lower pace than expenditures in 2012 and consequently the budget deficit would reverse the significant improvement recorded in 2011. Still, public finances remain healthy on the overall amidst the prevailing global fiscal driven distress.

• Shift from tight to loose monetary policy
Turkey's monetary conditions were marked in 2012 by a shift from a tightening policy at the beginning of the year to an easing policy since mid-year, as shown by a decrease in the overnight rates due to reduced inflationary pressures since April and improved risk appetite towards Turkey. In parallel, the Central Bank of the Republic of Turkey's reserves grew significantly during the second half of the year owing to the CBRT's recent policy implementations, namely the rise in the upper limit for foreign exchange that may be held to fullfill the Turkish Lira reserve requirements.

• Satisfactory bank growth and robust financial soundness within tough operating conditions
The Turkish banking sector witnessed in 2012 a satisfactory activity growth in a year of slowing down domestic economic performances and amidst global sluggishness driven by European neighbours' fiscal demise. Total assets of banks operating in Turkey, reflecting the sector's activity size, pulled out an 8.6% increase in local currency terms in the first nine months of 2012. Turkish banks continue to report rising activity indicators and boast robust financial soundness indicators on the overall, thus remaining well positioned to weather the current global economic sluggishness.

• Capital markets at the image of economic resilience and rating upgrades
The Turkish benchmark stock index consolidated its recent gains, reporting a 49.7% cumulative increase over the first 10 months, way surpassing the rise posted by S&P's emerging markets index, and raising market capitalization to US$ 284.5 billion, the equivalent of 36.4% of GDP. Also, within debt markets, benchmark yields reached record lows. The two-year bond yield plunged from 11.17% at the beginning of the year to 5.97% today amidst a gradual improvement in Turkey's sovereign risk premium following a streak of rating upgrades.

The Turkey Economic Report by Bank Audi can be accessed at http://www.banqueaudi.com