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The price paid for the lower C/A deficit is weak growth, which tests the government's dedication to contain external imbalances. Given the acceleration in credit growth, we expect this outlook to be partly reversed in favor of the GDP in 2013. A weaker TRY should be preferable to balance the risks albeit without jeopardizing the inflation outlook. Will monetary policy continue to be tweaked as needed?
We estimate that the Turkish economy expanded by merely 2.5% in 2012, posting the lowest figures since the Lehman crisis. This is much weaker than our 3% original estimate. In light of signs of economic recovery, we maintain our 4% growth forecast for 2013. A rapid rebound in the global economy would pose upside risks to growth at home.
A deeper-than-expected contraction in the external deficit accompanied Turkey's disappointing growth performance and the C/A deficit probably ended 2012 at 6.2% of GDP, below our original 6.6% estimate. Gold exports also contributed to this outcome. In line with the recovery in domestic demand and decline in gold exports, we foresee a 6.8% C/A deficit in 2013.
Despite the visible jump in annual inflation to 7.3% in January from 2012's 6.2%, we expect CPI to fall and foresee a 6.4% year-end figure. We expect the energy group to help disinflation, while food and tobacco tax hikes are the major drags in our base scenario.
The CBT has a more ambitious 5.3% inflation estimate for 2013, which we believe represents the CBT's strategy to anchor inflation expectations. As long as underlying inflation remains benign and long-term inflation expectations head toward the targets, temporary spikes in short-term inflation would not prompt monetary tightening, in our view. Credit growth and the real exchange rate will be the main determinants of monetary policy. In order to contain credit growth and to prevent the TRY's overvaluation, RRR hikes and interest rate corridor cuts may be on the agenda within the year.
The privatization agenda is loaded and may help beat the 2013 fiscal targets. That would aid in the lowering of the domestic debt roll-over ratio. The CBT's low interest rate policy and the ongoing uncertainties about the global growth outlook would help the sustainability of the low yield environment. We expect the benchmark bond yield to surface between 6.0-6.5% in 2013.
As for the currency, the CBT's dedication to contain the external deficit backs our expectation for a gradual depreciation of the FX basket (0.5 USD +0.5 EUR) to 2.09 by the end of the year. We anticipate that the fundamentals will remain strong and support capital inflows to Turkey, avoiding a rapid depreciation of the currency.
The ruling Justice and Development Party (AKP) submitted its proposal to switch to the presidential system from the current parliamentary one as part of a broader constitutional reform. This may pave the way for PM Erdogan's presidency from 2014 onwards. However, the AKP does not have enough seats to pass the new constitution in the Parliament, while the party can push for a referendum with little support from the opposition.
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