We remain positive on Turkey's structural growth prospects. Despite Euro area concerns, J.P. Morgan has revised Turkey's GDP growth forecast for 2010 from 5.1% to 5.9% as Turkey has limited trade and banking exposure to the more troubled southern periphery. We believe developed world economic growth will surprise on the upside. This along with strengthening domestic demand and a structurally low interest rate environment are supportive of economic growth. Inflationary pressures are weakening; June CPI fell from 9.1% to 8.4%oya. J.P. Morgan has revised Turkey's end-2010 headline CPI forecast to 6.9%oya from 7.2%. Due to the improvement in inflation dynamics and the downshift in global growth momentum, we now expect the CBRT to remain on hold until 2H11 vs. a cumulative 75bp hike in 4Q10.

Turkey's structural transformation and the improvement in economic fundamentals experienced over the past ten years have been largely attributed to the strong policy anchors provided by IMF programs and the EU convergence process. These lost relevance when the government decided to proceed without an IMF program and as the EU negotiations lost momentum. The government is hopeful that the fiscal rule to be implemented from 2011 onward will be the next powerful policy anchor. In our view, the fiscal rule is based on realistic assumptions and, if implemented rigorously, it could improve the government's credibility, facilitate Turkey's upgrade to investment grade status, and enhance the attractiveness of Turkish financial assets. Being a current account deficit economy, Turkish corporates should benefit from lower dollar funding costs and increased availability of credit.

Eoin Treacy's view Turkey has had its share of economic problems but has achieved impressive economic momentum; being relatively insulated from the EU's travails and benefitting from the growth of its domestic economy. The fiscal rule mentioned above is the commitment of the Turkish government to keep budget deficits to within 1% of GDP in an effort to reduce debt which is a laudable ambition. Governments rarely commit themselves to such fiscal discipline without external pressure and these measures are being proposed as an alternative to the prior IMF program.

While the bill to introduce this raft of measures was postponed last week, the likelihood that the government will eventually pass them appears to be reasonably high because the alternative would rattle confidence in the government's ability to manage the country's finances and raise the country's cost of capital. This article by Nese Karanfil for Hurriyet on July 16th may also be of interest.


In common with a relatively small number of other markets, the ISE National 100 has regained its pre-crisis highs. The Index lost momentum from late last year and unwound the overbought condition relative to the 200-day MA. It is now pressuring the high near 60,000 once more and a sustained move below 52,000 would be required to break the progression of rising reaction lows, the MA and question current scope for a successful upside break. (Also see comment of the Day on July 15th).