Country Report Turkey April 2011

Outlook for 2011-15: Policy trends

Regardless of the outcome of the general election, we expect Turkey to remain an open, largely market-driven economy with adequate public financial management and a well-regulated financial sector. Although Turkey suffered a deeper recession in 2008-09 than most other emerging markets, financial system stress and interest- and exchange-rate volatility were limited. After the election, reforms in areas such as taxation and employment are likely to be attempted. Privatisation will continue, particularly under the AKP, with the pace depending on market conditions. The privatisation of the three main state banks is on the government agenda, but may not be completed by 2015 owing to the large size of the banks and political sensitivities. After the election, the government may introduce a "fiscal rule" and other measures for the further improvement of public financial management, but we believe that it will be careful not to limit its ability to support growth in output and jobs and to distribute patronage, in so far as it is able to do so without damaging investor confidence. Although Turkey's strong budget and economic growth performance in 2010 have reassured investors, the economy is likely to remain vulnerable to sudden shifts in international sentiment because of its large external financing needs.

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