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									ISA July 2010 Country Report

 The ISA July 2010 Turkey Country Report
Turkey: Key Facts

 Overview:                                                           Key Facts and Data:

 • Turkey was the center of the vast Ottoman Empire that            • Official Name
 controlled most of the Middle East and Southeast Europe                  – Republic of Turkey
 during its apex.                                                   • Capital
                                                                          – Ankara
 • Following the fall of the Ottomans, modern Turkey was            • Government Type
 created by Mustafa Kemal Ataturk, who promoted a rapid
                                                                          – Republican parliamentary democracy
 modernization and secularization of the country.
                                                                    • Head of State
                                                                          – President Ahmed Abdullah Gul (since 2007)
 • Turkey’s large Kurdish minority has consistently pushed for
 more autonomy, and this has led to periods of violence             • Head of Government
 between Kurdish separatists and the Turkish military.                    – Prime Minister Recep Tayyip Erdogan (since 2003)
                                                                    • Population
 • Turkey is a member of NATO and has applied for European                – 76,806,000
 Union membership.                                                  • Land Area
                                                                          – 770.760 sq. km
 • Turkey is rapidly developing a large industrial base, which is   • Total GDP (US$)
 playing an increasing role in the Turkish economy.                       – $403 billion
                                                                    • Per Capita GDP at PPP (US$)
 • Turkey’s location at the crossroads between Europe and                 – $9,060
 Asia makes it one of the most strategically important places
                                                                    • Currency
 on the planet.
                                                                          – Turkish lira

   The ISA July 2010 Turkey Country Report
Table of Contents

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

   The ISA July 2010 Turkey Country Report
        Current Events and Recent Changes Overview

The ISA July 2010 Turkey Country Report
Turkey: Recent Political Events and Changes

 Key Political Events and Changes:

 • In May 2010, the parliament backed a series of
 constitutional changes that would transfer many powers
 away from the country’s judiciary and armed forces. As a
 result, these constitutional changes will be voted on in a
 referendum likely to be held later this year.

 • In May 2010, the leader of the opposition Republican
 People’s Party (CHP), Deniz Baykal, resigned after a video
 was released showing him having an affair with another CHP

 • More than 30 suspects, including a number of high-ranking
 military officers, were charged with plotting to overthrow the
 Erdogan government in recent months. Trials relating to this
 plot began in June 2010, raising political tensions.

 • Eleven soldiers were killed in eastern Turkey during a raid
 by Kurdish militants belonging to the PKK in June 2010. This
 led Prime Minister Erdogan to vow to crush the PKK.

 • Nine activists were killed when Israeli commandos storming
 an aid convoy from Turkey that was bringing aid and supplies
 to Gaza in June 2010. This led to a severe deterioration in
 relations between Israel and Turkey and international
 condemnation for Israel’s actions.
   The ISA July 2010 Turkey Country Report
Turkey: Recent Economic Events and Changes

 Key Economic Events and Changes:                                 Economic Highlight:

 • GDP growth rose to 6.0% on an annualized basis in the
 fourth quarter of 2009, it first expansion since mid-2008.
 Moreover, the outlook for the first half of 2010 was very
 positive, with double digit GDP growth likely.

 • Turkey’s industrial output rose by 21.1% year-on-year in
 March 2010.

 • Turkey’s inflation rate fell sharply to 9.1% year-on-year in
 May 2010.
                                                                       Source: ISA
                                                                       Economic Forecasts,
 • The International Monetary Fund (IMF) ended loan                    national statistics
 discussions with Turkey amid signs that the Turkish
 economy was beginning to recover from its recent downturn.

 • The country’s unemployment rate fell to 13.7% in April

 • In June 2010, Turkey agreed to establish free trade zones
 with Jordan, Lebanon and Syria in a bid to boost economic
 ties in the eastern Mediterranean region.

    The ISA July 2010 Turkey Country Report
Turkey: Other Recent Events and Changes

 Other Key Events and Changes:

 • 51 people were killed when a magnitude 6.0 earthquake
 struck eastern Turkey in March 2010. This prompted the
 government to order an overhaul to Turkey’s architectural

 • In May 2010, Russia and Turkey signed a deal that will
 allow Russia to build Turkey’s first nuclear power plant.

 • In May 2010, Iran and Turkey reached a deal that would
 send low-grade Iranian uranium to Turkey to be upgraded to
 research fuel rods for use in Iran.

 • Armenia halted the ratification of an accord that would
 normalize relations between Turkey and Armenia due to
 Turkey’s insistence on a peace deal over the disputed region
 of Nagorno-Karabakh.

 • 25 people were killed following an explosion in a coal mine
 in northern Turkey in May 2010.

 • 16 Russian tourists died when their bus crashed in
 southern Turkey in May 2010.

   The ISA July 2010 Turkey Country Report
                       Turkey Political Outlook

The ISA July 2010 Turkey Country Report
Turkey: Current Government

 Overview:                                              Key Members of the Government:

 • The AKP’s overwhelming election victories in 2002   • Head of State
 and 2007 has left them in complete control of the           – President Ahmed Abdullah Gul
 Turkish government. Following their 2007 election     • Head of Government
 victory, the AKP made a major cabinet reshuffle.            – Prime Minister Recep Tayyip Erdogan
                                                       • Minister of Foreign Affairs
                                                             – Ahmet Davutoglu
 • President Abdullah Gul has served as foreign
                                                       • Minister of Finance
 minister before controversially being elected
 president in 2007.                                          – Mehmet Simsek
                                                       • Minister of the Interior
                                                             – Besir Atalay
 • With little opposition in the parliament, the AKP   • Minister of Justice
 has been free to pursue their own agenda, although          – Sadullah Ergin
 keeping a close eye of both the European Union        • Minister of Defense
 and the powerful Turkish military.
                                                             – Mehmet Vecdi Gonul
                                                       • Minister of Industry and Trade
 • A government reshuffle was undertaken in May              – Nihat Ergun
 2009 following a poor performance by the ruling       • Minister of Labor and Social Security
 AKP in local elections earlier that year.                   – Omer Dincer

   The ISA July 2010 Turkey Country Report
Profile of Prime Minister Recep Tayyip Erdogan


 Prime Minister Erdogan came to power in 2002 following the landslide
 victory in that year’s elections by his Justice and Development Party
 • 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
      – Abdullah Gul served as prime minister between the election and
         Mr. Erdogan’s reinstatement.

 Prime Minister Erdogan is a conservative Muslim, but does not intend
 to end the country’s secularism.
 • His priorities are EU membership and political reform.

 Prime Minister Erdogan’s actions are being closely watched by the
 Turkish military in case of any moves to threaten Turkey’s secular
 political structure.
 • However, with EU membership the country’s key goal, there is little
 likelihood of the prime minister taking steps to introduce more Islamic laws
 in Turkey or of the military removing him.

   The ISA July 2010 Turkey Country Report
Turkey: Most Recent Elections
Parliamentary Elections – July 2007

 Summary of the Last Elections:                                  Results:

 The Islamic Justice and Development Party (AKP) of
 Turkish Prime Minister Tayyip Erdogan retained their
 grip on power in by winning early parliamentary                           Percentage of the Popular Vote
 elections in July 2007.
 • The AKP won nearly 47% of the popular vote, their highest
 amount ever.                                                              AKP                                                             46.7%
 • The election was seen as a battle between the Islamist
 AKP and their secular opponents.                                          CHP                              20.9%
 • The AKP leadership remains fairly moderate, but much of
 the party’s support came from more conservative elements           Nationalists                    14.3%
 of Turkish society.
                                                               Democratic Party         5.4%
 Opposition parties attempted to portray the AKP as a
 staunch Islamist party and warned voters that a new               Kurdish DTS          5.2%
                                                                                                                      Source: National
 AKP government would be a major threat to Turkey’s                                                                   election authority
 secular political system.                                               Others              7.5%
 • However, the main secular party, the Republican People’s
 Party (CHP) suffered a major defeat by winning only around                        0%    10%          20%           30%     40%            50%
 20% of the vote.
 • Meanwhile, the far-right Nationalist Movement Party
 performed well, winning 14% of the vote and qualifying for
 representation in the parliament for the first time.

   The ISA July 2010 Turkey Country Report
Turkey’s Leading Political Forces:
Justice and Development Party (AKP)


 The AKP currently is the governing party of Turkey and                       Share of Vote in Recent Elections
 is easily the largest party in the country.
 • It is the main successor to the outlawed Islamist Welfare                              Previous results include
                                                                45%                       previous incarnations of
 Party and its successors.
 • Party leader Prime Minister Recep Tayyip Erdogan was         40%                              the party.
 previously the mayor of Istanbul from 1994 to 1998.            35%
 Key Policies and Stances:                                      15%
 • The AKP supports Turkey’s drive for European Union                                                       Source: National
                                                                 5%                                         election authority
 membership and the maintenance of strong ties with the
 West.                                                           0%
                                                                      1983    1987        1991   1995   1999      2002     2007

 • However, more nationalist elements of the party oppose        Outlook:
 many of the EU’s conditions for membership.
                                                               The AKP are the latest incarnation of a mainstream Islamist
 • The AKP has also supported the IMF’s economic reform        political force in Turkey to gain a wide following.
 packages for Turkey.                                          • However, the party faces strong opposition from secularist
                                                               opponents, including many military leaders who have
 • The AKP opposed the US-led war in Iraq and refused to       threatened to have the party banned if it pushes to change the
 allow the US to use Turkey as a staging ground for the war.   country’s secular institutions.
                                                               • Meanwhile, a move to ban the party was launched in 2008.

   The ISA July 2010 Turkey Country Report
Turkey’s Leading Political Forces:
Republican People’s Party (CHP)


 The CHP is the second-largest political party in Turkey                           Share of Vote in Recent Elections
 and is the leading secularist political force in the
 country.                                                          35%
                                                                                                                   Source: National
 • The CHP has consolidated the center-left of Turkish politics    30%                                             election authority
 under its banner.
 • The CHP regained some of the support it lost in recent
 elections in 2002 and 2007.                                       20%

 Key Policies and Stances:

 • The party is a leading proponent of liberalizing Turkey’s        5%
 economy, an about-face from previous center-left parties.
                                                                          1983    1987        1991   1995   1999       2002     2007
 • The party fiercely opposed the US-led war in Iraq and the
 proposed use of Turkish territory and bases in that war.           Outlook:
 • The party is opposed to any changes in the secular nature      Despite the dominance of the AKP, the CHP will remain a
 of Turkey, but has relaxed its stance towards conservative       force in Turkish politics for many years to come due to its
 Muslims in recent years.                                         nationwide organization.
                                                                  • Nevertheless, the rise of nationalist parties holds significant
                                                                  threats for the CHP.
                                                                  • In addition, the resignation of longtime leader Deniz Baykal in
                                                                  2010 was a further blow to the party.

   The ISA July 2010 Turkey Country Report
Turkey’s Leading Political Forces:
Nationalist Movement Party (MHP)


 The Nationalist Movement Party has benefited from the                             Share of Vote in Recent Elections
 rise in nationalism in Turkey in recent years.
 • The party qualified for representation in the parliament               Source: National
 following its strong showing in the 2007 national elections.             election authority
 • The party’s support comes primarily from Turkey’s Anatolian
 heartland.                                                       14%
 Key Policies and Stances:                                         6%
 • The MHP is the most nationalist of all major parties in         2%
                                                                         1983     1987         1991   1995   1999      2002   2007
 • The MHP wants Turkey to develop closer ties with the Turkic
 peoples in Central Asia.                                          Outlook:

 • The party has been a leading proponent of taking a strong     The MHP’s future outlook has improved thanks to the rise
 position against Kurdish separatists.                           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.

   The ISA July 2010 Turkey Country Report
Turkey’s Leading Political Forces:
Democratic Party (DP)


 The Democratic Party was founded as the True Path                                Share of Vote in Recent Elections
 Party in 1983 by Suleyman Demirel, who was banned
 from politics at that time.                                      30%
                                                                                                                  Source: National
 • The party led the Turkish government in the early 1990s.                                                       election authority
 • However, the party has lost much of its earlier support and
 is increasingly being pushed to the margins of Turkish           20%

 Key Policies and Stances:                                        10%

 • The Democratic Party favors economic liberalization and         5%

 lower taxes.
                                                                         1983    1987        1991   1995   1999       2002     2007
 • The DP is strongly in favor of maintaining Turkey’s secular
 status.                                                           Outlook:
 • The party supports closer ties with the West, including       The DP faces a major crisis as it attempts to shake off the
 European Union membership.                                      scandals and poor performances of the last decade and re-
                                                                 establish itself as one of Turkey’s leading parties.
                                                                 • For this to happen, it will need to find a charismatic leader and
                                                                 hope that the rise of the more nationalist is just a temporary

   The ISA July 2010 Turkey Country Report
Key Political Issue in Turkey
European Union Membership

                                                         Potential Hurdles
 European Union leaders begin accession talks
 with Turkey in October 2005.                            • Referendums on Turkish membership in a
 •The agreement was threatened by Turkey’s refusal       number of European Union countries.
 to officially recognize Cyprus, but a deal was          • Veto of Turkish membership by Cyprus or
 reached whereby the Turkish government will avoid       other EU countries.
 doing so directly.
                                                         • Rejection of EU demands by the Turkish
 •The talks officially started in June 2006, despite
 protests from Cyprus.                                   parliament or military.
                                                         • Human rights or economic violations that
 Turkish membership in the EU will not occur             end negotiations.
 before 2016 as accession talks are expected to          • A rejection of future EU constitutions in
 last ten years.                                         any country holding a referendum.
 •In addition, the EU will not set its next seven-year
 budget until 2014.
 •Moreover, the rejection of the EU constitution in
 2005 could further delay Turkish membership.

  Turkish membership in the European Union is at least one decade away, if it will 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.
   The ISA July 2010 Turkey Country Report
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.                                         1960 Coup
 •Ataturk was the founder of modern Turkey and the         The ten-year reign of the Democratic party
 leading proponent of Turkey’s modernization and           was ended and Prime Minister Menderes and
 secularization.                                           others were hanged on charges of corruption.
 –The army has staged three coups since 1960 and
 was the main force behind the removal of the              1980 Coup
 previous Islamist government in 1997.                     The army took over the government and
                                                           implemented martial law following widespread
 The generals oppose many of the concessions               violence between leftist and rightist forces.
 the government has made to improve Turkey’s
 chances of EU membership.
                                                           1997 Intervention
 •These includes potential concessions with regards
 to Cyprus and the Kurds.
                                                           The army forced Islamist Prime Minister
                                                           Necmettin Erbakan to resign and eventually
 • In 2009 and 2010, the government arrested dozens
 of high-ranking military officers in connection with an   banned his Welfare Party from politics.
 alleged plot to overthrow the Erdogan government.

    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.
   The ISA July 2010 Turkey Country Report
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 ongoing Kurdish question, the water dispute with Syria and
                                             Iraq and the continuing rivalry with Greece.

                                              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.

   The ISA July 2010 Turkey Country Report
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 EU, helping to cement relations
                                                     between the two long-time rivals.
                                             • Worst-Case Scenario
                                                  – Turkey is rejected by the EU and the situation in
                                                     Cyprus deteriorates, leading to a war between Greece
                                                     and Turkey.

   The ISA July 2010 Turkey Country Report
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 an autonomous (and prosperous) Kurdish
                                             region within a new Iraqi state.

                                             • 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 EU membership results in improved
                                                     relations between Ankara and Turkey’s Kurdish
                                                     minority as well as with Kurds in neighboring countries.
                                             • Worst-Case Scenario
                                                  – Iraqi Kurds prompt increased fighting inside Turkey,
                                                     leading toward a full-blown conflict that also involves
                                                     Turkey’s neighbors.

   The ISA July 2010 Turkey Country Report
Potential Flashpoint: The Euphrates and Tigris Rivers

    Flashpoint Summary                              Main Actors                          Global Implications                              Maps

 Both Iraq and Syria are dependent       Turkey                                   Middle East Regional Stability
 upon the Euphrates and Tigris           • Turkey controls the headwaters         • Any conflict involving Turkey,
 rivers for their water supplies.        of both the Euphrates and Tigris         Iraq or Syria has implications for
 Moreover, both countries are            rivers.                                  the wider region, potentially
 facing major water shortages as                                                  involving such powers as Iran and
 demand for water soars.                                                          Israel.
 However, Turkey controls the            Iraq
 headwaters of both rivers and has       • Nearly all of Iraq’s water supplies
 built a series of dams and              come from the Euphrates and              The Kurds
 reservoirs along both rivers in         Tigris rivers.                           • Turkey’s efforts to improve
 order to ensure that southeastern                                                relations with its Kurdish minority
 Turkey receives much of these           Syria                                    were a key reason why Turkey
 rivers’ waters.                                                                  has moved to take control of the
                                         • The Euphrates River is the only        waters of both rivers.
                                         source of water for many areas of
 As the population in all three          Syria.
 countries continues to rise,                                                     Iran
 demand for water will do the            Iran                                     • Iran is the only other country in
 same. Moreover, groundwater                                                      the region that has significant
 resources in the region are being       • Iran is the only other potential       water supplies that can be
 depleted. As such, a severe             source of freshwater for Iraq if         exported to water-poor countries
 drought could exacerbate tensions       Turkey uses a larger share of the        in the region.
 in the region.                          Tigris and Euphrates rivers.

     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.

    The ISA July 2010 Turkey Country Report
Military Spending

                                              Strengths and Weaknesses

                                             Turkey has one of the strongest militaries in the region.
                                             • However, it faces potential threats along all of its borders.
                                                  – This has resulted in it proving very difficult for the
                                                    Turkish military to concentrate its forces on any single
                                                  – 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.

                             Source: SIPRI
                                             The military retains a great deal of influence in Turkey and
                                             it is responsible for much of Turkey’s foreign policy
                                             initiatives, including ties with Israel and its distance from
                                             the conflict in Iraq.
                                             • Nevertheless, the military’s position is being threatened by
                                             the ongoing move for EU membership and it remains to be
                                             seen how the military will react to this.

   The ISA July 2010 Turkey Country Report
Turkey: Political Risk Outlook

 Current Political Risk Ratings:                                         Political Risk Outlook:

                              Risk Measurements                         • Turkey continues to face high levels of political risk
                                                                        due to instability along its borders and the risk of
      Internal Conflict                                                 terrorism.
   Extremist Influence

Less Central Authority
                                                                        • In addition, the risk of a military coup have risen in
                                                                        recent months as the military fears that the AKP is a
     Regional Conflict
                                                                        major threat to Turkey’s secular political system.
       Global Conflict

            Terrorism                                                   • At present, Turkey’s political risk levels are well
                          0    1   2   3   4   5   6   7   8   9   10   above those of other European Union countries, a
                              Low Risk………………High Risk
                                                                        factor that will play a major role in Turkey’s
                                                                        negotiations with the EU.
  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

     The ISA July 2010 Turkey Country Report
                      Turkey Economic Outlook

The ISA July 2010 Turkey Country Report
Turkey: Economic Overview

 Economic Summary:                                                Economic Performance Comparisons:

 In recent years, Turkey has emerged from its worst
 economic recession since 1945.
 • Turkey has suffered from three major recessions since
 1994, highlighting the volatility of the country’s economy.
      – While more volatility is expected over the near-term,
        the government has taken steps to ensure that the
        economy will become more stable in the future.

 The growth of the manufactured export sector will
 provide Turkey with a more solid economy base.
 • However, Turkey’s growing service sector will continue to be
 exposed to external shocks.                                           Source: ISA
                                                                       Economic Forecasts
      – The tourism sector is particularly vulnerable to
        political unrest and Europe’s economic performance.

 Turkey’s turn towards an export-based economy will                     Size of the circle
 benefit the country in the long-run, though the economy               indicates the size
 will remain somewhat unstable over the next three to five              of the economy
 • Furthermore, Turkey has the potential to serve as an engine
 of European economic growth as it has a growing population
 and a low-cost work force.                                                     Per Capita GDP at PPP

   The ISA July 2010 Turkey Country Report
Turkey: Wealth Comparisons

 Per Capita GDP at PPP (US$)                    Key Wealth-Related Issues and Trends

                                                  Turkey would easily be the poorest
                                                    member of the European Union
                                                           should it join.

                                                  Moreover, Turkey has major wealth
                                                   discrepancies, with some areas
                                                   suffering from extreme poverty.

                          Source: World Bank        Meanwhile, some larger urban
                                                    centers have seen a significant
                                                      increase in wealth levels.

   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.

  The ISA July 2010 Turkey Country Report
Social Classes Breakdown

 Chart: % of Population by Social Class                   Chart: % of Households by Earnings

                                                                       Household Breakdown by Earnings (US$)
                                   Social Class A:
                                    High Income        Above $50,000   1.4%

                                   Social Class B:     Above $25,000       8.5%
                                   Upper-Mid Class

                                    Social Class C:    Above $10,000                       42.0%
                                   Lower-Mid Class
                                                        Above $5,000                                           76.3%
                                   Social Class D:
                                                                   0%         20%       40%      60%       80%         100%

                                           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.

   The ISA July 2010 Turkey Country Report
Turkey: GDP Growth Outlook

 Chart: GDP Growth Rates                    Current Outlook:

                                            • After its longest continuous expansion in more than
                                            20 years, the Turkish economy experienced a major
                                            slowdown in growth in 2008 as inflationary pressures
                                            pushed growth rates downwards.

                                            • By 2009, Turkey was in a full-blown recession as
                                            export revenues fell dramatically in the wake of the
                                            global economic crisis.
           Source: ISA
           Economic Forecasts,
           national statistics
                                            Future Outlook:

                                            • Turkey’s economy is in a recovery phase as export
                                            demand begins to return.

                                            • However, the risk of another slowdown in key
                                            European export markets could dampen growth
                                            prospects in the years ahead.

  The ISA July 2010 Turkey Country Report
Keys to Economic Growth in Turkey

               Key Factors

       Foreign Investment in Export-
           Oriented Operations

                                                             The government is
        Exchange Rate Fluctuations                          taking steps towards
                                                           reducing the impact of
                                                            internal and external
                                                           economic shocks in a
             Political Stability                               bid to increase
                                                             economic 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.

  The ISA July 2010 Turkey Country Report
Key Economic Issue in Turkey
Turkey’s Economic Volatility

 Over the past decade (and beyond), Turkey has
 had one of the world’s most volatile
 • In the past 17 years alone, it has suffered four
 severe recessions.

 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.
 • Few Turkish companies were successful outside           Source: ISA
 of Turkey as these companies’ revenues were               Economic Forecasts,
                                                           national statistics
 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.
   The ISA July 2010 Turkey Country Report
Turkey: Key Economic Sector
The Automotive Industry


 Turkey’s automotive industry is benefiting from
 new foreign investments.
 • Turkey is seen as a low-cost manufacturing base
 for price-sensitive automotive products.

 Leading foreign investors include Ford, Fiat,
 Renault and Bridgestone.
 • Ford has transferred all of their European light truck
 assembly to Turkey.
 • Many of the world’s leading tire manufacturers
 have manufacturing facilities in Turkey.


 Turkey’s new car market has proven extremely
 volatile as it rises and falls with the Turkish
 • Now that the industry is focusing on exports, the
                                                                 Source: OICA
 future looks much brighter for Turkey’s automotive

   The ISA July 2010 Turkey Country Report
Turkey: Industrial Production Growth Outlook

 Chart: Industrial Production Growth Rates          Current Outlook:

                                                    • Industrial production fell sharply in recent years as
                                                    export demand weakened, particularly in Europe.
                              Source: ISA
                              Economic Forecasts,
                              national statistics

                                                    Future Outlook:

                                                    • Many of Turkey’s key industrial sectors will
                                                    continue to suffer from the effects of the global
                                                    economic slowdown, before industrial output
                                                    recovers later in the forecast period.

   The ISA July 2010 Turkey Country Report
Turkey: Inflation Outlook

 Chart: Inflation Rates                           Current Outlook:

                                                  • The weakness of the lira, coupled with high food
                                                  and energy prices, threatened to add to inflationary
                            Source: ISA           pressures and prolong the current economic
                            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

   The ISA July 2010 Turkey Country Report
Turkey: Foreign Trade Overview

  Chart: Leading Trade Partners                                         Chart: Current Account Balance

                   Exports and Imports (mil. US$)




                               Source: ISA
                               Economic Forecasts,                        Source: ISA
    UK                         national statistics                        Economic Forecasts,
                                                                          national statistics
           0   1,000   2,000    3,000    4,000      5,000       6,000

    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.

    The ISA July 2010 Turkey Country Report
Turkey: Foreign Investment

 Chart: FDI Inflows                          Foreign Investment Climate:

                                             Turkey faces numerous challenges in attracting foreign
                                             • These include fears of political destabilization and economic
     Source: UNCTAD
                                             • Turkey’s ongoing negotiations with the European Union will
                                             be a key determinant in foreign investment levels in Turkey in
                                             the future.

                                             Much current and future FDI will focus on price-sensitive
                                             manufactured exports for Europe and the Middle East.
                                             • 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.

                                             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

   The ISA July 2010 Turkey Country Report
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.

  The ISA July 2010 Turkey Country Report
Turkey: Exchange Rates

 Chart: Exchange Rate with the US Dollar        Chart: Exchange Rate with the Euro

                         Source: ISA                                      Source: ISA
                         Economic Forecasts,                              Economic Forecasts,
                         OANDA                                            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 months and is likely to weaken over the near-term.

  The ISA July 2010 Turkey Country Report
Cost of Living Comparisons

  Regional Cost of Living Comparisons                                   Global Cost of Living Comparisons

                    Cost of Living (Dubai = 100)                                           Cost of Living (New York = 100)

      Nairobi                                                           New York

     Istanbul                                                               Sydney
       Beirut                                                                 Dubai

       Cairo                                                                 Beijing
                                                                      Mexico City
                0   20      40       60      80    100     120                         0           50               100      150

                                                         Source: US State

   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.

    The ISA July 2010 Turkey Country Report
Fiscal Policy Overview

 Chart: Fiscal Balance                           Current Outlook:

                                                 • The government has made significant strides in
                                                 reducing Turkey’s huge fiscal deficit.

                                                 • This fiscal deficit peaked at nearly 16% of GDP in
                                                 2001, following that year’s economic crash.

                           Source: ISA
                           Economic Forecasts,
                           national statistics   Future Outlook:

                                                 • The government is determined to improve its
                                                 finances as it pushes for European Union

                                                 • Nevertheless, the threat of economic volatility
                                                 means that future increases in the fiscal deficit
                                                 cannot be ruled out.

   The ISA July 2010 Turkey Country Report
Turkey: Labor Force

 Chart: Unemployment Rate                         Labor Force Overview:

                                                  Unemployment rose rapidly following the 2001
                                                  • The unemployment rate will hold steady through 2007 as
                                                  companies hold back on new hires due to the current
                                                  economic uncertainty.

                                                  In the long-run, the low-cost of the Turkish labor force
                                                  will attract additional foreign investment.
                                                  • However, Turkey will add 15 million new people to its
                                                  working-age population by 2020.
                            Source: ISA                 – The result will be a continuing high unemployment
                            Economic Forecasts,
                            national statistics
                                                           rate and increasing labor-related emigration to

                                                  Outlook For the Labor Force:

                                                  Unemployment will remain a serious problem throughout
                                                  the forecast period, though the expansion of the
                                                  manufacturing and services sectors will ease
                                                  unemployment growth in the latter part of this decade.

  The ISA July 2010 Turkey Country Report
Largest Companies in Turkey

                                                Leading Companies:

                                               The Koc Group, Turkey’s largest company, is a
                                               multinational conglomerate with numerous activities.
                                               • It is involved in the automotive, IT, food, retail, energy,
                                               consumer goods and electronics industries.

                                               Tupras-Turkiye Petrol is Turkey’s leading oil refiner.

                                               Turkiye Is Bankasi is the largest financial enterprise in

                                               The Sabanci Group is a conglomerate made up of nearly
                              Source: Forbes
                                               70 diverse companies.

                                                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.

  The ISA July 2010 Turkey Country Report
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                                                 The cities of south-
                shipping and industrial                                              central Turkey lie at
                center and is Turkey’s                                                 the heart of the
                 second-largest port.                                                 country’s leading
                                                                                     agricultural region.

  The ISA July 2010 Turkey Country Report
Forecast Assumptions and Risk

 Assumptions:                                             Risks:

 A Slow Global Recovery                                   Major Inflationary Pressures
 Global economic growth will accelerate over the          Rising demand levels in Asia, coupled with potential
 near-term, but weaker consumer and business              supply disruptions, could fuel major increases in
 demand levels will prevent global economic growth        natural resource prices, leading to a period of
 from reaching pre-crisis levels over the near-term.      soaring inflation rates around the world.
 Oil Prices Will Remain Near Present Levels               International Large-Scale Terrorist Activities
 Oil prices will not rise too far over the near-term as   The potential for large-scale terrorist actions in the
 demand levels will remain constrained, but supply        near-term remains high and could have major
 fears will prevent oil prices from falling too far.      implications for the global economy.

 The US Dollar Will Not Experience a Major Fall           EU Membership in Rejected
 Despite concerns about economic imbalances in the        If either the EU rejects Turkish membership or
 US, the US dollar will not fall too far against other    Turkey rejects the EU’s conditions, then a major
 major currencies over the course of the forecast         political fallout can be expected, with nationalists
 period, and will strengthen over the longer-term.        seeing a major increase in support.
 Turkish Membership in the EU Not Before 2025             Another Economic Crash
 Given the fact that the latest seven-year EU budget      While a economic downturn on the scale of 2001 is
 has been agreed upon, there is no way that Turkey        not likely due to export growth, the potential for
 could join the EU prior to 2016, and popular             future downturns remains significant as Turkey’s
 resistance will keep Turkey out even longer.             financial systems are still highly vulnerable.

   The ISA July 2010 Turkey Country Report
Turkey: Economic Risk Outlook

 Current Economic Risk Ratings:             Economic Risk Outlook:

                                            • Economist risk levels rose in recent months as the
                                            threat of a recession as risen sharply.

                                            • Higher levels of foreign investment would help to
                                            reduce economic risk levels in the long-term as it
                                            would allow the economy to diversify, lessening the
                                            threat of more severe recessions.

                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

  The ISA July 2010 Turkey Country Report
       Turkey Demographic and Environmental Outlook

The ISA July 2010 Turkey Country Report
Turkey: Population Overview

 Chart: Total Population                                     Chart: Working-Age Population

                      Total Population                                    Working-Age Population

  90,000,000                                                 60,000,000


  60,000,000                                                 40,000,000


  30,000,000                                                 20,000,000
                                      Source: US Census                                             Source: US Census
  20,000,000                          Bureau                                                        Bureau
  10,000,000                                                                          Working-Age    Non-Working-Age
          0                                                          0
               1950    1970   1990   2010    2030     2050                2000    2010   2020   2030      2040    2050

  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.
   The ISA July 2010 Turkey Country Report
Population Growth By Ten-Year Age Increments

                                                   Total Population By Age-Group
                 Source: US Census
 80,000,000      Bureau
             0           2000               2 0 10               2020               2030                    2040               2050
       80+            5 9 7 ,0 0 0       9 6 5 ,0 0 0         1,4 8 1,0 0 0     2 ,0 3 6 ,0 0 0         3 ,2 6 3 ,0 0 0    5 ,0 3 3 ,0 0 0
       70-79          1,8 2 0 ,0 0 0    2 ,5 6 3 ,0 0 0       3 ,14 1,0 0 0     4 ,9 0 1,0 0 0           7 ,112 ,0 0 0     8 ,7 0 1,0 0 0
       60-69         3 ,3 8 6 ,0 0 0    4 ,0 3 7 ,0 0 0      6 ,14 6 ,0 0 0     8 ,7 6 5 ,0 0 0         10 ,5 5 4 ,0 0 0   11,5 4 2 ,0 0 0
       50-59          4 ,5 16 ,0 0 0    6 ,7 9 6 ,0 0 0      9 ,6 0 7 ,0 0 0    11,4 7 3 ,0 0 0         12 ,4 7 2 ,0 0 0   11,6 8 5 ,0 0 0
       40-49          7 ,110 ,0 0 0     10 ,0 0 6 ,0 0 0     11,8 9 9 ,0 0 0    12 ,8 9 4 ,0 0 0        12 ,0 4 8 ,0 0 0   10 ,9 2 8 ,0 0 0
       30-39         10 ,2 10 ,0 0 0    12 ,10 9 ,0 0 0      13 ,0 9 3 ,0 0 0   12 ,2 12 ,0 0 0         11,0 5 9 ,0 0 0    10 ,6 6 5 ,0 0 0
       20-29         12 ,2 3 6 ,0 0 0   13 ,2 10 ,0 0 0      12 ,3 0 5 ,0 0 0   11,13 1,0 0 0           10 ,7 2 5 ,0 0 0   9 ,9 4 2 ,0 0 0
       10 - 19       13 ,3 0 9 ,0 0 0   12 ,3 8 3 ,0 0 0     11,19 0 ,0 0 0     10 ,7 7 5 ,0 0 0        9 ,9 8 2 ,0 0 0    9 ,2 16 ,0 0 0
       0-9           12 ,4 8 3 ,0 0 0   11,2 5 3 ,0 0 0      10 ,8 16 ,0 0 0    10 ,0 0 9 ,0 0 0        9 ,2 3 5 ,0 0 0    8 ,7 6 1,0 0 0

  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.
   The ISA July 2010 Turkey Country Report
Middle East and North Africa Population Trends by Country

                     Total Population                                 Contribution to Regional Population
                                                                              Growth (2000-2050)
700,000,000      Source: US Census
                 Bureau                                        Saudi Arabia
400,000,000                                                            Iraq

300,000,000                                                         Algeria
         0                                                           Israel
              1950    1970       1990   2010   2030     2050                                  Source: US Census
     Egypt                   Turkey            Algeria
     Morocco                 Iraq              Saudi Arabia               0%   5%     10%    15%     20%          25%
     Yemen                   Israel            Others

   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 double by the year 2050, reaching 640 million people.

   The ISA July 2010 Turkey Country Report
Turkey: Leading Urban Centers

 Chart: Largest Urban Centers               Summary:

                                            • Istanbul is Turkey’s largest city and is growing

                                            • 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

                            Source: World

  The ISA July 2010 Turkey Country Report
Key Demographic Issue in Turkey
Turkish Workers for Europe?

      Change in the Working-Age Populations             When Europe, especially Germany, needed workers in
                                                           the past they found them in Turkey.
              in Europe (2000-2025)
                                                        •  Today, many European countries are once again
                          A need for workers               finding themselves in need of foreign workers.
                           in Germany and                    – Turkey, with its growing population and ties
                          Southern Europe.                       with Europe is a potential source.
                            Source: US Census
                                                        With a rapidly growing population and an unstable
 France                                                     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
  Spain                                                 •   Moreover, exporting workers helps maintain civil
                                                            order in difficult economic times.

   -10,000,000     0       10,000,000      20,000,000

   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.
   The ISA July 2010 Turkey Country Report
Turkey: Topography and Climate

 Topography and Climate:                                    Key Environmental Issues:

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

   The ISA July 2010 Turkey Country Report
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.
       – These rivers are the main sources of fresh
           water for Syria and Iraq.

  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, the
           fourth-largest dam 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.
  The ISA July 2010 Turkey Country Report
Turkey: Demographic and Environmental Risk Outlook

 Current Risk Ratings:                                                    Demographic Risk Outlook:

                              Risk Measurements                          • Turkey has one of Europe’s fastest-growing work
                                                                         forces and this will actually improve demographic risk
      Natural Disasters
                                                                         levels if the economy continues to expand.

   Environmental Risk

Age-Characteristic Risk


          Social Issues

                          0     1   2   3   4   5   6   7   8   9   10    Environmental Risk Outlook:
                              Low Risk………………High Risk
                                                                         • Natural disasters are a major risk for Turkey as all of
  ISA Risk Ratings                                                       its major cities are located in areas with frequent
     – 0.0 to 1.9 = Low Risk                                             earthquakes.
     – 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

     The ISA July 2010 Turkey Country Report
ISA July 2010 Country Report

 The ISA July 2010 Turkey Country Report

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