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ISA March 2015 Country Report

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1 ISA March 2015 Country Report

2 Turkey: Key Facts Overview: Key Facts and Data:
Turkey was the center of the vast Ottoman Empire that controlled most of the Middle East and Southeast Europe during its apex. Following the fall of the Ottomans, modern Turkey was created by Mustafa Kemal Ataturk, who promoted a rapid modernization and secularization of the country. Turkey’s large Kurdish minority has consistently pushed for more autonomy, and this has led to periods of violence between Kurdish separatists and the Turkish military. Turkey is a member of NATO and has applied for European Union membership. Turkey is rapidly developing a large industrial base, which is playing an increasing role in the Turkish economy. Turkey’s location at the crossroads between Europe and Asia makes it one of the most strategically important places on the planet. Official Name Republic of Turkey Capital Ankara Government Type Republican parliamentary democracy Head of State President Recep Tayyip Erdogan (since 2014) Head of Government Prime Minister Ahmed Davutoglu (since 2014) Population 80,694,000 Land Area sq. km Total GDP (US$) $822 billion Per Capita GDP at PPP (US$) $18,800 Currency Turkish lira

3 Table of Contents Current Events: Economic Outlook: Political Outlook:
Recent Political Events Recent Economic Events Other Recent Events Economic Overview GDP Growth Forecasts Key Sector Forecasts Inflation Forecasts Foreign Trade Forecasts Foreign Investment Forecasts Exchange Rate Forecasts Outlook for Key Sector Key Economic Issue Economic Risk Outlook Political Outlook: Overview of the Current Government Leadership Profile Summary of the Most Recent Elections Leading Party #1 Leading Party #2 Leading Party #3 Leading Party #4 Forecast for the Next Elections International Relations Outlook Potential Conflict #1 Potential Conflict #2 Military Capabilities Key Political Issue Political Risk Outlook Demographic & Environmental Outlook: Population Overview Population Characteristics Development of Leading Urban Centers Key Demographic Issue Topography and Climate Overview Environmental Threat Summary Key Environmental Issue Demographic and Environmental Risk Outlook

4 Current Events and Recent Changes Overview

5 Turkey: Recent Political Events and Changes
Key Political Events and Changes: The government continued its crackdown on the supporters of exiled cleric Fethullah Gulen. In addition, Turkey has issued an arrest warrant for Mr. Gulen, who is living in exile in the United States. The government’s efforts to pass a tough new security bill in early 2015 raised fears that President Erdogan was positioning himself to be able to squash all dissent without opposition. The government reiterated that it would not launch ground operations against the Islamic State militant group in Syria or Iraq. Rival Kurdish groups battled one another and with Turkish security forces in southeastern Turkey in recent months as Turkey remaining unwilling to equip Kurdish forces battling the Islamic State across the border in Syria. The Marxist DHKP-C group claimed that it carried out January 2015’s suicide bomb attack in Istanbul that left two people dead.

6 Turkey: Recent Economic Events and Changes
Key Economic Events and Changes: Economic Highlight: Turkey’s economic growth rate fell to just 1.7% on a year-on-year basis in the third quarter of 2014. Exports from Turkey declined by 9.8% year-on-year in January 2015 due to weakening demand in most of Turkey’s key export markets. Turkey’s inflation rate fell sharply 7.2% year-on-year in January 2015. Turkey’s central bank cut interest rates by 50 basis points to 7.75% in January 2015, and more rate cuts are expected in the coming months. The lira weakened sharply against the US dollar and many other currencies in February 2015 and has lost nearly 80% of its value against the US dollar since 2013. President Erdogan once again criticized the country’s central bank, raising fears about the central bank’s ability to retain its independence. Turkey’s unemployment rate rose to 10.7% in November 2014. Source: ISA Economic Forecasts, national statistics

7 Turkey: Other Recent Events and Changes
Other Key Events and Changes: Turkey warned that it would need more help to deal with the increasing number of refugees from Syria that have been entering the country in recent months. By early 2015, there were more than 1.5 million Syrian refugees in Turkey. A new influx of Syrian Kurds fled to Turkey in recent months. The country’s education council called for religious classes to be made compulsory for all children in the country’s nursery schools. President Erdogan inflamed tensions with secular women in Turkey when he claimed that women were not equal to men. In January 2015, the government authorized the first new Christian church to be built in Turkey in more than 90 years.

8 Turkey Political Outlook

9 Turkey: Current Government
Overview: Key Members of the Government: The AKP’s overwhelming election victories in the last three national elections has left them in complete control of the Turkish government. Prime Minister Erdogan won a clear victory in August 2014’s presidential election in Turkey, the country’s first-ever direct election for the presidency. He moved to the presidency later that month. After August 2014’s presidential election, AKP leaders selected Foreign Minister Ahmet Davutoglu to be Turkey’s new prime minister. Head of State President Recep Tayyip Erdogan Head of Government Prime Minister Ahmet Davutoglu Minister of Foreign Affairs Mevlut Cavusoglu Minister of Finance Mehmet Simsek Minister of the Interior Efkan Ala Minister of Justice Bekir Bozdag Minister of Defense Ismet Yilmaz Minister of Science, Industry and Technology Fikri Isik Minister of Economy Nihat Zeybekci

10 Profile of President Recep Tayyip Erdogan
Background: President Erdogan was first selected as prime minister in 2002 following the landslide victory in that year’s elections by his Justice and Development Party (AKP). He had been banned from running in those elections due to an earlier conviction for reading an Islamic poem at a party function. A change to the constitution allowed him to become prime minister in 2003 as Abdullah Gul served as prime minister between the election and Mr. Erdogan’s reinstatement. He led the AKP party to further election victories in 2007 and 2011. In 2014, Mr. Erdogan ran for the presidency and easily won Turkey’s first-ever direct presidential election. President Erdogan is a conservative Muslim, but has not moved to end the country’s secularist tradition. In recent years, he has focused his efforts on boosting Turkey’s economic competitiveness and improving Turkey’s relations with its neighbors. President Erdogan has managed to take away much of the Turkish military’s political power, the first Turkish leader that has achieved this in modern times. Nevertheless, Turkey’s secular opposition and many elements of the country’s armed forces remain opposed to his policies.

11 Turkey: Most Recent Elections Presidential Election – August 2014
Summary of the Last Elections: Results: Prime Minister Recep Tayyip Erdogan decided to run for the presidency after the country’s electoral system was changed to allow for the direct election of the presidency in Turkey. Eventually, Mr. Erdogan won a clear victory in 2014’s presidential election, winning 51.8% of the vote in the first round, thus avoiding the need to contest a run-off election. The former general secretary of the Organization of Islamic Cooperation, Ekmeleddin Ihsanoglu, finished a distant second with 38.4% of the vote. The Kurdish political leader Selahattin Demirtas finished in third place with 9.8% of the vote. The presidential election campaign was dominated by Prime Minister Erdogan’s candidacy and his bid to strengthen the office of the presidency. The secular opposition in Turkey accused Mr. Erdogan of becoming much too autocratic and seeking to weaken the political opposition. Source: National election authority

12 Turkey: Most Recent Elections Parliamentary Elections – June 2011
Summary of the Last Elections: Results: Prime Minister Erdogan and his AKP party won a third term in office in June 2011’s parliamentary election, but had its number of seats in the parliament reduced. The AKP party won 50% of the popular vote and 326 of the 550 seats in the parliament, just shy of the 331 seats they won in 2007 and not enough seats to make changes to the constitution without the support of the political opposition. The country’s secular opposition party, the Republican People’s Party (CHP), gained 23 seats to win 135 seats in total, while the far-right Nationalist Movement Party (MHP) lost 18 seats to now hold 53. The AKP’s desire to win enough seats to change the country’s constitution was the dominant issue in 2011’s national election. Moreover, the AKP was strengthened by the strong performance of the Turkish economy in the years before the election, with Turkey outperforming most of its neighbors during the global economic crisis in 2008 and 2009. Source: National election authority

13 Turkey’s Leading Political Forces: Justice and Development Party (AKP)
History: The AKP currently is the governing party of Turkey and is easily the largest party in the country. It is the main successor to the outlawed Islamist Welfare Party and its successors. Under the leadership of President Erdogan, the AKP has strengthened its grip on power and made major gains in each of the last three national elections. Source: National election authority Key Policies and Stances: The AKP supports a greater Turkish role in the politics of the Middle East and a stronger Turkish voice on the world stage. The party has followed a policy of maintain good relations with all of Turkey’s neighbors. The AKP has also supported the IMF’s economic reform packages for Turkey that have boosted the country’s economic competitiveness in recent years. The AKP has cooled towards the European Union, after initially favoring Turkish membership in that organization. Outlook: The AKP are the latest incarnation of a mainstream Islamist political force in Turkey to gain a wide following. However, the party faces strong opposition from secularist opponents, including many military leaders who have threatened to have the party banned if it pushes to change the country’s secular institutions. Nevertheless, the party has survived a number of attempts to have it banned thanks to its overwhelming popularity.

14 Turkey’s Leading Political Forces: Republican People’s Party (CHP)
History: The CHP is the second-largest political party in Turkey and is the leading secularist political force in the country. The CHP has consolidated the center-left of Turkish politics under its banner. The CHP regained some of the support in recent years after suffering major defeats during elections in the previous two decades. Source: National election authority Key Policies and Stances: The party is a leading proponent of liberalizing Turkey’s economy, an about-face from previous center-left parties. The party has been a vocal opponent of the United States’ increased military presence in the Middle East. The party is opposed to any changes in the secular nature of Turkey, but has relaxed its stance towards conservative Muslims in recent years. Outlook: Despite the dominance of the AKP, the CHP will remain a force in Turkish politics for many years to come due to its nationwide organization. Nevertheless, the rise of nationalist parties holds significant threats for the CHP. The party made gains in 2011, but remains well behind the AKP in terms of overall support.

15 Turkey’s Leading Political Forces: Nationalist Movement Party (MHP)
History: The Nationalist Movement Party has benefited from the rise in nationalism in Turkey in recent years. The party qualified for representation in the parliament following its strong showing in the 2007 national elections and remained in the parliament despite losing seats in 2011. The party’s support comes primarily from Turkey’s Anatolian heartland. Source: National election authority Key Policies and Stances: The MHP is the most nationalist of all major parties in Turkey. The MHP wants Turkey to develop closer ties with the Turkic peoples in Central Asia. The party has been a leading proponent of taking a strong position against Kurdish separatists. Outlook: The MHP’s future outlook has improved thanks to the rise of nationalist sentiment in Turkey in recent years. For the party to continue to grow, it will need a major falling out with the EU or the IMF in order to once again promote nationalist sentiment in Turkey.

16 Key Political Issue in Turkey European Union Membership
Potential Hurdles European Union leaders begin accession talks with Turkey in 2005. The agreement was threatened by Turkey’s refusal to officially recognize Cyprus, but a deal was reached whereby the Turkish government will avoid doing so directly. The talks officially started in mid-2006, despite protests from Cyprus and have progressed it fits and starts since that time. Turkish membership in the EU is unlikely to occur at any time in the near future given the declining support for Turkish membership in the EU, both from within Turkey and within EU member states. Recent polls have shown that a majority of Turkish voters are now opposed to EU membership for Turkey, while many EU member states have called for a referendum on Turkey’s bid for membership. Moreover, EU member states have questioned the Turkish government’s commitment to democratic principals. Referendums on Turkish membership in a number of European Union countries. Veto of Turkish membership by Cyprus or other EU countries. Rejection of EU demands by the Turkish parliament or military. Human rights or economic violations that end negotiations. A rejection of future EU constitutions in any country holding a referendum. Turkish membership in the European Union is not likely in the coming years and may not occur at all. What is certain is that there is widespread opposition to Turkish membership in many European Union countries and these objections must be overcome before Turkey can join the EU as a full member.

17 Key Political Issue in Turkey The Power of the Generals
Previous Interventions of the Army The Turkish army sees itself as the protector of Ataturk’s legacy in Turkey. Ataturk was the founder of modern Turkey and the leading proponent of Turkey’s modernization and secularization. The army has staged three coups since 1960 and was the main force behind the removal of the previous Islamist government in 1997. The generals oppose many of the concessions the government has made to improve Turkey’s chances of EU membership. These includes potential concessions with regards to Cyprus and the Kurds. In recent years, the AKP-led government has arrested dozens of high-ranking military officers in connection with an alleged plot to overthrow the Erdogan government, weakening the armed forces’ influence in Turkish politics. 1960 Coup The ten-year reign of the Democratic party was ended and Prime Minister Menderes and others were hanged on charges of corruption. 1980 Coup The army took over the government and implemented martial law following widespread violence between leftist and rightist forces. 1997 Intervention The army forced Islamist Prime Minister Necmettin Erbakan to resign and eventually banned his Welfare Party from politics. The latest attempt to curb the power of Turkey’s generals has gone well for the AKP government thus far, but the army continues to wield significant power. The generals know, however, that another coup may signal the end of Turkey’s hopes to join the EU and will thus refrain from reacting to these reductions of their power.

18 Turkey: International Relations Outlook
Key International Disputes: Turkey has a history of conflict with most of its neighbors and some of these disputes carry forward to the present day. The three most volatile disputes in the coming years will be the on-going Kurdish question, the water dispute with Syria and Iraq and the continuing rivalry with Greece. Moreover, Syria’s civil war has seriously destabilized Turkey’s southern border. International Relations Outlook: Turkey’s attempts to join the European Union will go a long way towards defining its future role in international affairs. Meanwhile, Turkey will face a number of challenges along its borders as well as with its large Kurdish minority that has close ties to the Kurdish populations in Iraq, Iran and Syria.

19 Potential Flashpoint: Cyprus
Flashpoint Summary Main Actors Global Implications Maps Although Cyprus peacefully declared independence from the United Kingdom, Greece and Turkey in 1960, efforts by Greek Cypriot nationalists wanting to reunite with Greece led to a coup d'état in 1974. Turkey then invaded under the pretext of protecting Turkish Cypriots, establishing the Turkish Republic of Northern Cyprus in the northern third of the island. With the discovery of oil and natural gas reserves in the “Leviathan Field” off the south-eastern coast of Cyprus, tensions have risen between the Republic of Cyprus and Turkey. Republic of Cyprus The Republic of Cyprus is seeking to reestablish sovereignty over the whole island Turkish Republic of Northern Cyprus The Turkish Republic of Cyprus claims sovereignty over the northern third of the island and is recognized as a state by Turkey. Turkey Turkey demands that the island be reunified before any drilling or exploration for oil and gas is conducted by the Republic of Cyprus. European Union Cyprus’ EU membership has strained relations between the EU and Turkey. Cypriot Oil and Natural Gas Cyprus has the potential to be a new source of oil and gas for energy-hungry Europe. EU Membership The issue of Cyprus has been the biggest obstacle facing Turkey’s potential membership in the European Union. Turkey’s Rising Power Turkey’s power and influence in the Middle East and Southeastern Europe is clearly on the rise. Potential Outcomes Turkey’s growing power and influence forces Greek Cypriots to take a closer look at steps to reduce fears of Greek domination of a unified Cyprus, paving the way for a peace deal. Rising tensions between Turkey and Greece lead to clashes in Cyprus that could lead to a wider war.

20 Potential Conflict: The Kurds
Main Disputes: The Kurds make up nearly 20% of Turkey’s population, but their culture is suppressed. While most Kurds are integrated into Turkish society, a minority remain fiercely devoted to the Kurdish identity. Turkey fears that an autonomous (and prosperous) Kurdish region within Iraq could attract Kurdish separatists from Turkey. Turkey is investing billions of dollars to improve the economic situation in the poor Kurdish areas in the southeast. Best- and Worse-Case Scenarios: Best Case Scenario Turkey’s drive for improved relations with its neighbors results in improved relations between Ankara and Turkey’s Kurdish minority as well as with Kurds in neighboring countries. Worst-Case Scenario Kurds in Iraq or Syria prompt increased fighting inside Turkey, leading toward a full-blown conflict that also involves Turkey’s neighbors.

21 Potential Conflict: Greece
Main Disputes: The division of Cyprus into Greek and Turkish enclaves continues to spark tension between the two countries. Turkey disputes Greece’s claims to control over most of the territory of the Aegean Sea. Turkey has supported Muslims in Bosnia and Albania whereas Greece retains close ties with Serbia. Many politicians in Greece are staunchly against Turkish membership in the European Union. Best- and Worse-Case Scenarios: Best Case Scenario Turkey joins the European Union, helping to cement relations between the two long-time rivals. Worst-Case Scenario Turkey is rejected by the EU (or rejects the EU itself) and the situation in Cyprus deteriorates, leading to a war between Greece and Turkey.

22 Potential Flashpoint: The Euphrates and Tigris Rivers
Flashpoint Summary Main Actors Global Implications Maps Both Iraq and Syria are dependent upon the Euphrates and Tigris rivers for their water supplies. Moreover, both countries are facing major water shortages as demand for water soars. However, Turkey controls the headwaters of both rivers and has built a series of dams and reservoirs along both rivers in order to ensure that southeastern Turkey receives much of these rivers’ waters. As the population in all three countries continues to rise, demand for water will do the same. Moreover, groundwater resources in the region are being depleted. As such, a severe drought could exacerbate tensions in the region. Turkey Turkey controls the headwaters of both the Euphrates and Tigris rivers. Iraq Nearly all of Iraq’s water supplies come from the Euphrates and Tigris rivers. Syria The Euphrates River is the only source of water for many areas of Syria. Iran Iran is the only other potential source of freshwater for Iraq if Turkey uses a larger share of the Tigris and Euphrates rivers. Middle East Regional Stability Any conflict involving Turkey, Iraq or Syria has implications for the wider region, potentially involving such powers as Iran and Israel. The Kurds Turkey’s efforts to improve relations with its Kurdish minority were a key reason why Turkey has moved to take control of the waters of both rivers. Iran Iran is the only other country in the region that has significant water supplies that can be exported to water-poor countries in the region. Potential Outcomes Water shortages in southeastern Turkey worsen, leading to Turkey taking larger amounts of water from the Tigris and the Euphrates, resulting in severe water shortages in Iraq and Syria. This would force Iraq to seek to import water from neighboring Iran, giving Iran even more influence in that country. Turkey’s improving ties with the Iraqi and Syrian governments allow all three sides to reach an amicable solution to the water allocation issue. However, this will not reduce the growing demand for water in the three countries and this will result in likely water shortages in all three countries in the coming years. In the meantime, water will become a major issue as Turkey and Iran compete for influence in Syria and Iraq.

23 Military Spending Strengths and Weaknesses Outlook
Turkey has one of the strongest militaries in the region. However, Turkey faces potential military threats along all of its borders. This multitude of threats has resulted in it proving very difficult for the Turkish military to concentrate its forces on any single region. Moreover, a large number of Turkish forces are tied down in south-eastern Turkey in order to deal with Kurdish separatists and the unstable border with Iraq. Turkey lacks major force projection capabilities. It is seeking to increase its spending on air and sea forces to expand its range of military influence in order to match its growing ambitions in the region. Source: SIPRI Outlook The military retains a great deal of influence in Turkey and it is responsible for much of Turkey’s foreign policy initiatives, including defense ties with Israel. Nevertheless, the military’s position has been weakened by the AKP-led government and this has led to a shift in defense priorities in recent years.

24 Turkey: Political Risk Outlook
Current Political Risk Ratings: Political Risk Outlook: Turkey continues to face high levels of political risk due to instability along much of its border and the high risk of terrorism. Turkey’s position at one of the most important geographic locations on earth also has raised political tensions. The wars in neighboring Syria and Iraq have destabilized a large section of southeastern Turkey and threatened to drag Turkey into these conflicts. Despite the country’s recent economic and political success, political risk levels remain high and will remain high for the foreseeable future. Low Risk………………High Risk ISA Risk Ratings 0.0 to 1.9 = Low Risk 2.0 to 3.9 = Low to Moderate Risk 4.0 to 5.9 = Moderate Risk 6.0 to 7.9 = Moderate to High Risk 8.0 to 10 = High Risk

25 Turkey Economic Outlook

26 Turkey: Economic Overview
Economic Summary: Economic Performance Comparisons: Over the past decade, Turkey has enjoyed some of its highest economic growth rates in modern times, despite a slowdown in recent years. However, Turkey has suffered from four major recessions since 1994, highlighting the volatility of the country’s economy and the risks facing the economy. The growth of the manufacturing export sector has provided Turkey with a more solid economic base. However, Turkey’s growing service sector will continue to be exposed to external shocks. Turkey’s tourism sector is particularly vulnerable to political unrest and Europe’s economic performance. Turkey’s turn towards an export-based economy will benefit the country in the long-run, though the economy will remain somewhat unstable over the next three to five years due to the weakness of key European export markets. However, a fast-growing domestic market will help to shield Turkey from some of these external risks. Size of the circle indicates the size of the economy Avg. Annual GDP Growth Source: ISA Economic Forecasts Per Capita GDP at PPP

27 Turkey: Wealth Comparisons
Per Capita GDP at PPP (US$) Key Wealth-Related Issues and Trends Turkish wealth levels have reached those of much of Central and East Europe, but remain just half of that of West Europe. Moreover, Turkey has major wealth discrepancies, with some areas suffering from extreme poverty. Meanwhile, some larger urban centers have seen a significant increase in wealth levels. Source: World Bank As Turkey’s population growth slows and economic opportunities grow, Turkey will realize a significant increase in per capita GDP levels. Nevertheless, it will take decades of strong economic growth for Turkey to close the gap with the wealthier countries of Central Europe or the Middle East.

28 Social Classes Breakdown
Chart: % of Population by Social Class Chart: % of Households by Earnings Social Class A: High Income Professionals Social Class B: Upper-Mid Class Professionals Social Class C: Lower-Mid Class Professionals Social Class D: Poor Source: Survey data Nearly all people in Turkey are in the lower half of the social scale, with a small minority controlling a great deal of the country’s wealth. Nevertheless, significant progress has been made in reducing poverty, particularly in the western part of the country. In the central and eastern parts of Turkey, poverty remains widespread.

29 Turkey: GDP Growth Outlook
Chart: GDP Growth Rates Current Outlook: After soaring in 2010 and 2011, economic growth in Turkey slowed significantly in recent years as domestic and export demand weakened. Growth failed to meet expectations in 2014, falling well below government forecasts. Source: ISA Economic Forecasts, national statistics Future Outlook: Turkey’s economy will remain sluggish over the near-term as export demand and inflationary pressures combine to slow growth. Moreover, the risk of a prolonged stagnation in key European export markets could dampen growth prospects in the years ahead.

30 Keys to Economic Growth in Turkey
Key Factors Foreign Investment in Export-Oriented Operations The government is taking steps towards reducing the impact of internal and external economic shocks in a bid to increase economic stability. Exchange Rate Fluctuations Political Stability Consumer Confidence Levels on the Domestic Market Foreign investment and the promotion of exports are keys to Turkey’s future economic performance. Moreover, with population growth being brought under control, the chances for increasing purchasing power levels are improving.

31 Key Economic Issue in Turkey Turkey’s Economic Volatility
Source: ISA Economic Forecasts, national statistics Over the past two decades, Turkey has had one of the world’s most volatile economies. In the past two decades alone, Turkey has suffered through four severe recessions. Interesting, Turkey did manage to avoid falling into a recession following the debt crisis in Europe earlier this decade. There are a number of reasons why Turkey’s economy is so volatile. Political instability, both domestic and regional, has had an impact on consumer confidence and foreign investment. Domestic demand has fluctuated wildly over the past two decades. Moreover, few Turkish companies were successful outside of Turkey as these companies’ revenues were highly dependant upon sales in Turkey. Economic volatility will remain a serious problem for the Turkish economy over the next few years. However, the expansion of export-based industries will help to reduce volatility in the long-run, provided that major external shocks such as regional conflicts or new protectionist agendas do not occur.

32 Turkey: Key Economic Sector The Automotive Industry
Summary: Turkey’s automotive industry has benefiting a surge in foreign investment over the past two decades. For major automotive manufacturers, Turkey is seen as a low-cost manufacturing base for price-sensitive automotive products. Leading foreign investors include many of the world’s leading automotive suppliers. Carmakers such as Ford and Fiat also have a large presence in Turkey where they produce lower-cost vehicles for sale in Europe and the Middle East. Many of the world’s leading tire manufacturers also have major manufacturing facilities in Turkey. Outlook: Turkey’s new car market has proven extremely volatile as it rises and falls with the Turkish economy. Now that the industry is focusing on exports, the future looks much brighter for Turkey’s automotive industry. Moreover, the outlook for Turkey’s domestic automotive market has improved markedly in recent years. Source: OICA

33 Turkey: Industrial Production Growth Outlook
Chart: Industrial Production Growth Rates Current Outlook: Industrial production growth soared in 2010 and 2011 thanks to a surge in both domestic and export demand. However, weaker export demand has hurt the country’s industrial sector in recent years. Source: ISA Economic Forecasts, national statistics Future Outlook: Many of Turkey’s key industrial sectors will struggle as European export markets remain weak, keeping industrial production growth rates from reaching their potential over the forecast period.

34 Turkey: Inflation Outlook
Chart: Inflation Rates Current Outlook: After decades of inflationary pressures, Turkey has enjoyed 15 years of relatively stable inflation rates. Nevertheless, inflation rates remain too high for comfort at around 8%. Source: ISA Economic Forecasts, national statistics Future Outlook: The key for future inflationary trends will be the volatility of the Turkish lira that will keep inflation from falling further at least until later in the forecast period.

35 Turkey: Foreign Trade Overview
Chart: Leading Trade Partners Chart: Current Account Balance Source: ISA Economic Forecasts, national statistics Turkey is rapidly becoming an important center for manufactured exports to Europe and the Middle East. While exports have suffered in recent years due to the weakness of key European export markets, the longer-term outlook calls for healthy export growth rates in the years ahead.

36 Turkey: Foreign Investment
Chart: FDI Inflows Foreign Investment Climate: Turkey has done a much better job of attracting foreign investment over the past decade than in the past. Previously, Turkey attracted mostly low-cost manufacturing investments from companies seeking to export to Europe. However, the growth of Turkey’s domestic market has resulted in more foreign investment being aimed at Turkish consumers. Price-sensitive manufactured exports for Europe and the Middle East will remain a key component of foreign investment in Turkey. Textiles and the automotive industry will be leading recipients of this investment. Western Turkey has already developed into the region’s most important manufactured-export center. Source: UNCTAD Outlook For Future Foreign Investment: The Turkish government must do more to promote foreign investment, including further investment incentives for job-creating manufacturing operations. As the countries of Eastern Europe become more expensive, Turkey will be in a position to gain significant amounts of manufacturing FDI, if the political climate is favorable.

37 Regional Foreign Investment
Source: UNCTAD Foreign investment levels in the Middle East and North Africa have risen sharply in recent years thanks to major investments in the region’s oil and gas industry. Moreover, as many countries in the region move to diversify their economies, they are attracting foreign investment in a number of non-energy-related sectors.

38 Turkey: Exchange Rates
Chart: Exchange Rate with the US Dollar Chart: Exchange Rate with the Euro Source: ISA Economic Forecasts, OANDA Source: ISA Economic Forecasts, OANDA The introduction of the new lira in 2005 was designed to reduce confusion among foreign investors and tourists, while hopefully stabilizing what had been one of the region’s most unstable currencies. However, the currency has fluctuated wildly in recent years, but is forecast to stabilize in the coming years.

39 Cost of Living Comparisons
Regional Cost of Living Comparisons Global Cost of Living Comparisons Source: US State Department Cost of living levels are very high in Istanbul, whereas in the rest of the country, living costs are far lower. In fact, Istanbul is one of the most expensive cities in the entire Eastern Mediterranean region.

40 Fiscal Policy Overview
Chart: Fiscal Balance Current Outlook: After running a massive fiscal deficit nearly a decade ago, the Turkish government has done a better job of maintaining its financial health in recent years. Source: ISA Economic Forecasts, national statistics Future Outlook: The current government is determined to maintain financial health in the wake of the economic crisis in Europe. Nevertheless, the threat of economic volatility means that future increases in the fiscal deficit cannot be ruled out.

41 Turkey: Labor Force Chart: Unemployment Rate Labor Force Overview:
Unemployment rates in Turkey have trended upwards in recent years. Moreover, long-term unemployment remains a serious problem in Turkey. In the long-run, the low-cost of the Turkish labor force will attract additional foreign investment. However, Turkey will add millions of new people to its working-age population in the coming years, even as the country’s birth rate falls. As a result, Turkey’s unemployment rate will remain relatively high. Source: ISA Economic Forecasts, national statistics Outlook For the Labor Force: Unemployment will remain a problem throughout the forecast period, though the expansion of the manufacturing and services sectors will ease unemployment growth over the long-term.

42 Largest Companies in Turkey
Leading Companies: The Koc Group, Turkey’s largest company by a wide margin, is a multinational conglomerate with numerous activities. The highly diversified company is involved in the automotive, IT, food, retail, energy, consumer goods and electronics industries. The Sabanci Group is a conglomerate made up of nearly 70 diverse companies and now ranks as Turkey’s second largest-company. Meanwhile, banks now make up four of Turkey’s seven largest companies. Source: Forbes Outlook for Domestic Companies: Turkey’s largest companies are generally active on the domestic market, with only a handful of Turkish companies having significant foreign activities. However, Turkish companies are becoming more active in the region and this could prove to be a significant growth opportunity for Turkish enterprises in the near future.

43 Turkey Regional Economies
Most of Turkey is comprised of agricultural regions, but four main centers of commerce and industry dominate the country’s economy. By far the most important of these is the Marmara region, that includes Istanbul, Izmit and Bursa. The other major centers are Ismir, Ankara and the south-central region centered around Adana. The Marmara region is the heart of Turkish commerce and industry and is the center of foreign investment. Ankara is home to light manufacturing and agricultural markets. Izmir is a major shipping and industrial center and is Turkey’s second-largest port. The cities of south-central Turkey lie at the heart of the country’s leading agricultural region.

44 Forecast Assumptions and Risk
Risks: Uneven Global Economic Growth Economic growth will be strong in the United States and most “New World” economies, but Europe and Japan will continue to struggle. Growth in emerging markets will be steady, if unspectacular. Deflationary Pressures in Developed Economies A number of developed economies in Europe and Asia will face high levels of deflationary pressures that will persist over the longer-term in many of these regions’ weaker economies. Natural Resource Prices Trend Downwards The fall in oil and other natural resource prices over the past year will not be reversed as demand levels remain weaker in China and many other emerging markets, as well as in Europe and Japan. A Meltdown in the Middle East The potential for the level of political unrest in the Middle East and North Africa to become much worse is very high as conflicts of varying intensities wage across the region. A Strong US Dollar The US dollar will retain most of its recent gains against other currencies around the world as the US economy records strong growth and investors continue to seek safe havens for their investments. EU Membership in Rejected If either the EU rejects Turkish membership or Turkey rejects the EU’s conditions, then a major political fallout can be expected, with nationalists seeing a major increase in support. Turkish Membership in the EU Not Before 2030 Given the fact that the latest seven-year EU budget has been agreed upon, there is no way that Turkey could join the EU prior to 2016, and popular resistance will keep Turkey out even longer. Another Economic Crash Should economic volatility return on the extreme downside again in the near-future, the level of social and political unrest at home could rise to more dangerous levels.

45 Turkey: Economic Risk Outlook
Current Economic Risk Ratings: Economic Risk Outlook: Economist risk levels have trended downwards in recent years thanks to the higher level of stability for the Turkish economy. The weakness of key export markets in Europe has emerged as one of the key risks facing Turkey’s economy. Low Risk………………High Risk ISA Risk Ratings 0.0 to 1.9 = Low Risk 2.0 to 3.9 = Low to Moderate Risk 4.0 to 5.9 = Moderate Risk 6.0 to 7.9 = Moderate to High Risk 8.0 to 10 = High Risk

46 Turkey Demographic and Environmental Outlook

47 Turkey: Population Overview
Chart: Total Population Chart: Working-Age Population Source: US Census Bureau Source: US Census Bureau Turkey’s population growth is slowing, albeit at a very gradual pace. The result will be a major increase in working-age Turks over the next 15 years. If the economy does not grow fast enough to provide opportunities for these additional people, emigration pressures will rise, causing political rifts with Europe.

48 Population Growth By Ten-Year Age Increments
Source: US Census Bureau Turkey’s population growth will be large by European standards, but relatively small by the standards of the Middle East. As the birth rate declines, Turkey’s population will age. By 2030, over half of the population will be more than 40 years old.

49 Middle East and North Africa Population Trends by Country
Source: US Census Bureau Source: US Census Bureau The Middle East and North Africa is experiencing a major population increase as high birth rates lead to massive population growth in many countries. As a result, the region’s population will nearly double by the year 2050, reaching 640 million people.

50 Turkey: Leading Urban Centers
Chart: Largest Urban Centers Summary: Istanbul is Turkey’s largest city and is growing rapidly. Numerous other cities in Turkey have grown into substantial urban centers, including the capital city, Ankara, and the industrial center, Izmit. The largest population concentrations are in the northwest and the south-central areas of the country. Source: World Gazetteer

51 Key Demographic Issue in Turkey Turkish Workers for Europe?
When Europe, especially Germany, needed workers in the past they found them in Turkey. Today, many northern European countries are once again finding themselves in need of foreign workers. Turkey, with its growing population and ties with Europe is a potential source. With a rapidly growing population and an unstable economy, Turkey needs to export workers. Guest workers in Europe could help to improve ties between Turkey and Europe. Remittances still play a significant role in the Turkish economy. Moreover, exporting workers helps maintain civil order in difficult economic times. A need for workers in Germany and Southern Europe. Source: US Census Bureau Turkey’s economy will grow as a result of foreign investment, but not enough to create jobs for the 15 million new potential workers in Turkey. As in North Africa, the economic desperation of the jobless leads to flirtations with political and religious extremism. Turkey must avoid this situation for future economic growth and stability.

52 Turkey: Topography and Climate
Key Environmental Issues: Most of Turkey consists of highlands, including the Anatolian Plateau. High mountains are found in eastern Turkey and along both the Mediterranean and Black Sea coasts. North-western Turkey, including Thrace, consists of rolling hills and narrow coastal plains. Coastal regions of Turkey have a Mediterranean climate, with the southern coast having very hot summers and mild winters. Inland, the climate is more continental, with hot, dry summers and cold winters. Turkey often suffers violent earthquakes as it is located along several seismic zones. The 1999 earthquake which hit Izmit and the surrounding region killed over 14,000 people. All areas of the country are subject to periodic earthquakes. The expansion of Turkey’s tourism industry has been focused on the country’s coastal regions. As a result, many coastal regions have been overdeveloped with tourist resorts. Nearly all of Turkey’s major urban areas suffer from high degrees of air pollution. Traffic has increased and many of the vehicles used in Turkey do not meet developed countries’ emissions standards. Industrial regions also are heavily polluted.

53 Key Geographic Issue in Turkey Water Rights
With growing populations, the control of the Middle East’s fresh water supplies will be a crucial issue in the near future. Turkey controls the headwaters of the Tigris and Euphrates rivers and these rivers are the main sources of fresh water for Syria and Iraq. Moreover, demand for water in central and south-eastern Turkey has risen sharply in recent years. Turkey is in the midst of building a series of dams and reservoirs on the Euphrates River in the south-eastern region of the country. This is designed to expand available agricultural land through irrigation. This project includes the Ataturk Dam, one of the largest dams in the world. Turkey’s water control program will lead to serious tensions in the future between Turkey, Syria and Iraq. In fact, a war nearly broke out in 1975 between Turkey and Syria over this issue and that was before Turkey’s later projects. Watch for tensions to rise during particularly dry years, when the water reaching Syria and Iraq is reduced.

54 Turkey: Demographic and Environmental Risk Outlook
Current Risk Ratings: Demographic Risk Outlook: Turkey has one of Europe’s fastest-growing work forces and this will actually improve demographic risk levels if the economy continues to expand. Environmental Risk Outlook: Low Risk………………High Risk Natural disasters are a major risk for Turkey as all of its major cities are located in areas with frequent earthquakes. ISA Risk Ratings 0.0 to 1.9 = Low Risk 2.0 to 3.9 = Low to Moderate Risk 4.0 to 5.9 = Moderate Risk 6.0 to 7.9 = Moderate to High Risk 8.0 to 10 = High Risk

55 ISA March 2015 Country Report

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