1

GENERAL OUTLOOK Economic Developments: The Central Bank cut the policy rate by 0.75 basis points… Turkey's Central Bank cut its main interest rate slightly more than expected on June 24, but stopped short of jeopardizing its credibility with the sort of deeper move sought by the Prime Minister and the government. The bank cut its main one-week repo rate by 75 basis points to 8.75 percent, saying inflation was expected to start falling significantly from this month and that global liquidity conditions had recently improved. The market had been pricing in a moderate cut after Central Bank Governor Erdem Başçı said that the bank could lower rates if the inflation outlook was improving significantly. But annual inflation stood at 9.66 percent in May, well above the central bank's year-end forecast for 7.6 percent and its 5 percent medium-term target. The bank has repeatedly said it expects inflation to start falling from June. The bank kept its overnight lending rate at 12 percent and its overnight borrowing rate at 8 percent, giving it the flexibility to adjust banks' funding costs as needed. In May the Central Bank cut its one-week repo rate by 50 basis points, its first cut in a year. Prime Minister Recep Tayyip Erdoğan has once again heavily criticized the Central Bank over its interest rate policies, saying high rates are “keeping foreign investors away from the country.” “As a prime minister, I do not accept the interest rate policies of the Central Bank,” Erdoğan said in a speech at a fast-breaking iftar meal in Istanbul. “No entrepreneurs would get involved in investments in a country where rates are so high. Look, the rate policy in the U.S. is 1 percent; it is a minus figure in Japan; it is 1 percent in Israel. But your [Central Bank] policy is at around 8 or 9 percent, which goes up to 15-16 percent when commissions are considered. This is oppression,” he added. Turkey’s credit challenges increase with Iraq crisis according to Moody’s… The Iraqi crisis is credit negative for Turkey (Baa3 negative) because it pressures Turkey’s current account deficit, undermines its economic growth and adds inflationary pressures according to rating agency Moody’s. Moody’s said that Iraq is Turkey’s second-largest export market and accounted for USD 12 billion, or 8% of Turkish exports in 2013, up six fold from 2004. If the Iraq conflict continues for a prolonged period and also spreads to the Kurdistan region, it would have a material effect on Turkish exports, affecting almost 15% of exports (3% of GDP), and would slow the country’s economic growth the agency affirmed. Although the

JULY 2014

2

global oil price response has been relatively benign, with the Brent price for oil peaking at USD 115 after 10 June, when Mosul fell, and then falling to USD 113 on June 25, a larger and more permanent oil price shock would strain the rebalancing trend in Turkey’s current account balance that began earlier this year. The agency added that higher oil prices will also fuel inflation. In the first quarter of this year, energy prices barely contributed to inflation because there were no adjustments to administered prices. The central bank’s recent rate cuts are predicated on its expectation that inflation will decline from this month, based on the reduced effect of depreciation on core inflation. However, the agency statement concluded that there is still significant risk associated with higher energy inflation from higher global prices and regulated price adjustments. Fitch downgraded three of Turkey's leading private banks… Fitch downgraded ratings for Isbank, Garanti and Akbank. It also revised its outlook of Yapi Kredi to “negative” from “stable,” in line with its parent, Unicredit, which operates in Turkey through a an equal partnership with Koc Holding. “The downgrades reflect increased risks from recent rapid credit growth and higher external debt, against a background of moderate deterioration in most financial metrics in recent years,” a statement from Fitch said. Political Developments: Turkish drivers return Turkey after 23 days in captivity as ISIL's hostages, no news from Mosul consulate members… All 32 Turkish truck drivers held hostage by militants of the Islamic State of Syria and the Levant (ISIL) in Iraq flew back home to Turkey on late July 3 following their release after three weeks in captivity. Islamic militants have released all the drivers abducted in Iraq 23 days ago. The truck drivers were kidnapped June 9 in the wake of the militant group’s offensive on the city of Mosul. ISIL also abducted 49 staff members of the Turkish consulate in Mosul on June 11 after seizing the city. Foreign Minister Ahmet Davutoğlu confirmed that Turkey's consul general in Arbil received the drivers. Davutoğlu also added that only one of the drivers may need medical intervention and the rest are in a good condition. A Turkish Airlines plane carrying the drivers landed the airport of the South-eastern Turkish province of Şanlıurfa. Their families, as well as several local officials, met the drivers. Referring to the 49 Mosul consulate staff members who are still being held hostage, Davutoğlu said efforts were continuing to secure their release. ISIL renamed itself simply as the Islamic State (IS) after its leader declared a new Islamic state in lands seized in June across a strip of Iraq and Syria. Turkish main opposition parties nominated Ihsanoglu for President… Turkey's two main opposition parties - the Republican People's Party (CHP) and the National Movement Party (MHP) - have revealed a joint candidate to challenge presidential favourite, Prime Minister Recep Tayyip Erdogan, in the upcoming elections in August. CHP leader Kemal Kilicdaroglu and MHP leader Devlet Bahceli made the revelation of former Organization of Islamic Cooperation chief Ekmeleddin Ihsanoglu as their candidate in a meeting on June 16. The decision of the pro-secular center-left CHP and the right-wing MHP to put forward Ihsanoglu, known to be a moderate Islamist in the traditional sense, as a joint candidate for

3

presidency was a surprise. Erdogan has already been put down as the favourite to win. The vote will be the first time that Turkey's president is elected by direct popular vote. A candidate needs more than 50 percent of the popular vote to be elected in the first round. If none of the three expected candidates receives the required percentage, there will be a second round on August 24 between the two candidates who received the most votes. The former Secretary General of the Organization of Islamic Cooperation, Ekmeleddin Ihsanoglu described his joint candidacy by the opposition parties as a ‘great kindness.’ Ekmeleddin Ihsanoglu is a Turkish academic, diplomat and former Secretary-General of the Organization of Islamic Cooperation (OIC), the second largest intergovernmental organization after the United Nations. His mandate as the Secretary-General of OIC expired on 31 January 2014. On the other hand, the People’s Democratic Party (HDP) co-chair Selahattin Demirtaş also announced his candidacy on June 30, becoming the second contender in the presidential race. Erdoğan is candidate of the AKP for the Presidential election… Finally, the ruling Justice and Development Party (AKP) has officially named Prime Minister Recep Tayyip Erdoğan as its candidate for the country’s presidential election on July 1st. The announcement had been widely anticipated. Erdoğan, who had previously made clear his aspiration to become the country’s first ever president to be directly elected by popular vote, described the August election as a “milestone” for a "new era" during his acceptance speech. “Those who ask for a 'neutral' president in reality want a president who will side with the state against the people. That era is now closed,” he said. Erdogan has made it clear he is seeking a more powerful presidency which rivals fear may launch authoritarian rule in Turkey. Despite his alleged involvement in recent corruption scandal and mass protests against his rule Erdogan is expected to win the August vote. His name was officially announced by AKP Deputy Head Mehmet Ali Şahin, who stressed that the decision had been taken after long consultations, and that all AKP deputies backed the candidacy of the current prime minister. EU's Enlargement Commissioner welcomes Constitutional Court's role… European Commissioner for Enlargement and Neighbourhood Policy Stefan Füle has stated that the European Commission welcomes the role played by Turkey's Constitutional Court, which partially annulled a highly controversial law to restructure the Supreme Board of Judges and Prosecutors (HSYK) and removed a ban on Twitter and YouTube. Füle paid a two-day official visit in Ankara to meet with Turkish officials. During his visit, Füle met with Constitutional Court President Haşim Kılıç, who has spoken out against the government's recent bans on social media websites. Füle noted that moves by the Constitutional Court had given confidence to the hope that the polarization and politicization of society would end. “I recall the corruption allegations, reassignments of investigators and judges and particularly the rapid adoption of legislation which had not been consulted with the EU. All of these factors seemed to increasingly distance Turkey from European standards,” said Füle. After Turkey's recent corruption scandal European officials raised their concerns for Turkey's accession to the EU, which has stalled over some members' reluctance to grant Turkey membership and the unresolved Cyprus dispute. Füle also called on his Turkish interlocutors to decisively engage with the EU on a comprehensive and credible reform process and to follow a close dialogue with the commission in the areas of the rule of law and fundamental rights. During his visit, Füle also came together with EU Affairs Minister Mevlüt Çavuşoğlu and Justice Minister Bekir Bozdağ. Füle noted that the three of them had a very important meeting on Chapter 23 on the

4

QUARTERLY GROWTH RATES, (%)

-15

-12

-9

-6

-3

0

3

6

9

12

15

06 0

1 2 3 40

7 0

1 2 3 40

8 0

1 2 3 40

9 0

1 2 3 41

0 0

1 2 3 41

1 1 2 3 4

12 1 2 3 4

13 1 2 3 4

14 1

GROWTH RATES OF THE COMPONENTS OF

GDP (QUARTERLY, %)

-25

-20

-15

-10

-5

0

5

10

15

20

25

08

1 2 3 4

09

1 2 3 4

10

1 2 3 4

11

1 2 3 4

12

1 2 3 4

13

1 2 3 4

14

1

Agriculture Industry Services Construction

judiciary and fundamental rights. Füle also added that Turkey needs to commit to the relevant reforms, adding that the future of the accession process will not be determined by the results of the European Parliament (EP) elections but by Turkey's own performance. The results of the EP elections, which will determine Europe's policy in the coming years, caused concern in Turkey as euroskeptic and far-right parties made strong gains. Füle also came together with President Abdullah Gül; however, he did not meet with Prime Minister Recep Tayyip Erdoğan. Turkey removed ban on Youtube access… Turkey's telecoms regulator removed an official order blocking access to YouTube from its website in the beginning of June after the country's top court ruled that the ban was a breach of human rights. Blocks on access to YouTube and Twitter were imposed after illegal audio recordings, purportedly revealing corruption in Erdogan's inner circle, were leaked on the sites. The block on access to Twitter was lifted in April. The ban on YouTube was imposed on March 27 in the build-up to local elections after a tape of top security officials discussing possible military intervention in Syria was leaked. Turkey's highest court, deliberating appeals submitted by individuals challenging the ban, ruled that the block was a violation of the right to freedom of speech.

MACRO ECONOMIC DEVELOPMENTS

GDP grew by 4.3% in the first quarter of 2014... The GDP grew by 4.3% in the first quarter of 2014 compared to the same period of the previous year, which was better than expected. Growth was 2.9% in the first quarter of the previous year. According to the calendar adjusted figures GDP growth was 4.4% in the first quarter of the year; while the GDP increased by 1.7% compared to the previous period according to the calendar and seasonally adjusted data. The growth in the GDP was relatively strong despite the negative global conjuncture and economic and political fluctuations and interest hikes observed in the first quarter of the year.

5

GROWTH RATES OF THE COMPONENTS OF GDP ON

THE EXPENDITURE SIDE (Quarterly, %)

-45

-35

-25

-15

-5

5

15

25

35

45

55

07 0

1 2 3 408 0

1 2 3 409 0

1 2 3 410 0

1 2 3 411 1 2 3 4

12 1 2 3 4

13 1 2 3 4

14 1

PrivateCons.

PublicCons.

PrivateInv.

PublicInv.

A closer look at the GDP figures for the first quarter indicated that there was a slight decline in the growth rates of the agriculture and construction sectors; however growth in other sectors are stronger compared to the same period of the previous year. Meanwhile, growth in construction and services sectors fell compared to the previous quarter. While the growth in the agricultural sector was 3.9%, growth in the industrial sector was 5% and services sector grew by 5.7% in the January-March period. The growth in the construction sector was 5.2%. The contribution to growth was 0.2 percentage points for agriculture, 0.3 points for construction, 1.4 points for industry and 3.5 points for the services sector.

The first quarter GDP results indicated that there was acceleration in the public consumption expenditures; while the private sector consumption expenditures have declined. The total investments also fell in the first quarter of the year due to the decline in the private sector investments. Total consumption expenditures grew by 3.6%. While the private sector consumption grew by 2.9%; the public consumption rose by 8.6%. However, the total investments mainly dropped by 0.5% in the first quarter. While the private sector investments contracted by 1.3%, the public sector

investments rose by 4.1%. On the other hand, stocks fell by 1.2%. While exports grew by 11.4%, imports rose by only 0.8%; there was a positive contribution from the foreign demand to the GDP. Thus, the contribution of the domestic demand to the GDP was 2.8 points. The private consumption contribution to the GDP was 2.1 points, whereas the contribution was 0.9 points for the public sector consumption. The contribution of the private sector investments was negative with 0.3 points; while, the public sector investments contribution was 0.2 points. Furthermore, the stocks negatively affected the GDP by 1.2 points. The contribution to growth of the foreign demand was 2.7 points due to the rise in net exports. Consequently, growth in the first quarter was relatively strong despite the negative domestic and foreign factors. The sectorial growth rates in industry, services and construction sector exceeded 5%. On the other hand, the contribution to growth from domestic and foreign demands was relatively balanced in the first quarter. The noticeable factors here are the weak private sector consumption and decline in the private sector investments. Growth was again triggered by the public sector investments and consumption. The rise in the net exports and the slowdown in imports generated a positive contribution to growth on the foreign demand side. Consequently, we can say that growth in the first quarter is quite positive and the balance between domestic and foreign demand indicated that there was a relatively healthier growth structure compared to the previous quarters. However, the slowdown in the private sector consumption and investments is a source of concern for the following periods. On the other hand, we think that the positive growth will continue in the second quarter of the year, although at a slower rate, due to the optimistic financial climate after the local elections of March 30, falling interest rates and the rise in the consumer confidence. The improvement in the global risk appetite in May and the first half of June is another positive factor for the Turkish economy. The main downward risks for growth can rise with the escalating turmoil in Iraq since the middle of June. Consequently, our 2014 growth forecast is still 3.5% with upward risks due to the better than expected leading indicators for the second quarter.

6

MONTHLY INFLATION (%)

-4

-3

-2

-1

0

1

2

3

4

5

07

1 5 9

08

1 5 9

09

1

5 9

10

1 5 9

11

1 5 9

12

1 5 9

13

1 5 9

14

1 5

DPPI CPI

ANNUAL INFLATION RATES (%)

-5

0

5

10

15

20

07

1 4 7 10

08

1 4 7 10

09

01 4 7 10

10

01 4 7

10

11

01 4 7

10

12

01 4 7

10

13

01 4 7

10

14

01 4

PPI CPI

Selected Items from National Accounts

CPI rose by 0.31% in June: yearly CPI inflation is 9.16%... Despite expectations of decline, the CPI (consumer price index) rose by 0.31% on a monthly basis in June and the annual increase fell to 9.16% due to the base effects. On the other hand, the DPPI (domestic producer price index) increased by 0.06% on a monthly basis and the yearly DPPI increase fell to 9.75%. The increases in food and service prices were the main factors affecting the CPI inflation.

In this light, the highest price increase within the CPI index was in the prices of education sector which rose by 1.72%. The contribution to inflation was 0.04 percentage points. This was followed by the health sector prices which rose by 0.98%. Prices of hotel-restaurants increased by 0.92% and contributed to inflation by 0.06 points. The prices of miscellaneous good and services rose by 0.70%. The rise was 0.50% for transportation prices and the contribution to inflation was 0.08 points. The climb in food and non-alcoholic beverages was 0.36% which contributed by 0.09 points to inflation. The rise in other groups was more limited. On the other hand, prices in the clothing and shoes sector fell by 1.25% and had a 0.09 points negative contribution to inflation which neutralized the effect of the rise in food prices. In

yearly, % 2013-1 2013-2 2013-3 2013-4 2014-1

Domestic Demand* 3,5 5,0 4,6 6,0 2,8

Consumption 3,9 5,5 4,3 5,5 3,6

Private 3,4 5,1 4,7 5,3 2,9

Public 7,6 7,8 1,7 6,8 8,6

Total Investments 1,5 3,4 6,0 6,4 -0,5

Private -4,4 -0,9 3,6 4,9 -1,3

Public 51,3 27,5 17,1 11,5 4,1

Change in stocks* 0,1 2,9 1,9 1,4 -1,2

Foreign Demand* -0,7 -3,4 -2,2 -3,0 2,7

Export of goods and services 5,1 0,1 -2,3 -1,5 11,4

Import of gods and services (-) 7,1 11,8 5,8 9,3 0,8

GDP 2,9 4,5 4,3 4,4 4,3

Agriculture 4,7 5,7 2,8 0,9 3,9

Industry 1,4 3,4 4,3 4,6 5,0

Construction 5,8 7,6 8,6 6,2 5,2

Services 3,9 5,1 5,7 6,6 5,7

*contribution to growth

7

SELECTED CPI INDICATORS*

1%

3%

5%

7%

9%

11%

13%

15%

08

4 7 10

09

1 4 7 10

10

1

4 7

10

11

1 4 7 10

12

1 4 7 10

13

1 4 7 10

14

1 4

H: Energy, unprocessed food, alcoholic beverages, tobacco and gold excluded

I: Energy and all food, and oth. excluded

* Percentage change with respect respect to same month in the previous year.

CPI Components

% change Weights 2014

June

2014

June/

2013

June

TURKEY 100,00 0,31 9,16

Food and non-

alco. beverages24,45 0,36 12,47

Alco. beverages

and tobacco5,29 -0,06 2,92

Clothing and

footwear7,17 -1,25 8,51

Housing, water,

electricity, gas and

other fuels

16,41 0,24 5,29

Household

equipment7,52 0,46 9,19

Health 2,44 0,98 9,48

Transport 15,54 0,50 12,01

Communications 4,70 0,08 0,36

Recreation and

culture3,36 0,40 5,93

Education 2,26 1,72 9,28

Hotels, cafes and

rest.6,58 0,92 13,22

Miscell. goods

and services4,28 0,70 7,72

Special (core) CPI Aggregates

% change 2014

June

2014

June/

2013

June

A. CPI excl. seasonal

prod.0,59 9,50

B. CPI excl. unprocessed

food0,39 8,71

C. CPI excl. energy 0,30 9,98

D.(B) and (C) 0,38 9,58

E. (C) and alcoholic bev.

And tobacco prod.0,32 10,48

F. (E) and admins. prod,

other prod., indirect taxes0,30 10,36

G. (F) and (B) 0,41 10,02

H. (D) and alcoholic bev.,

tobacco and gold 0,43 10,17

I. (C) and excl. food and

non-alco. bev., alco. bev.

and tobacco

0,31 9,65

annual terms, the largest price increase was in restaurants-hotels with 13.22%, which was followed by the food and non-alcoholic beverages group with 12.47% and the transportation sector with 12.01%.

Although the core inflation indicators fell on monthly basis compared to the previous month, there was almost no change on yearly basis. The favourite core inflation index I (excluding all food and beverages, energy, and tobacco products) rose by 0.31%, with a yearly increase of 9.65%. On the other hand, the second favourite H index rose by 0.43% on monthly basis, causing an increase of 10.17% on yearly basis.

The DPPI inflation which comprises the industrial producer prices rose by 0.06%% in June; the yearly increase was 9.75%. Prices rose by 0.13% in the manufacturing sector and by 0.05% in the water sector; however, they fell by 0.68% in the electricity and gas sector and by 0.08% in the mining sector. On yearly basis, the prices in the manufacturing sector rose by 12.29%.

As a result, June CPI inflation was higher than expected. Inflation which generally decelerates in June because of seasonal factors, continued to climb this year due to the rising food prices before the month of Ramadan, the drought, the high oil prices and FX rates. The rise in the CPI inflation will make the task of the Central Bank difficult which is expected to cut the rates again in July. However, as the Central Bank is faced with great political pressure, we expect that it will continue to cut the policy rates indicating the convenient global conditions as a pretext. On the other hand, the statement that there will no hikes in natural gas and electricity prices for a while and the possible decline in food prices in July can cause a drop in inflation in July.

8

-25,0

-20,0

-15,0

-10,0

-5,0

0,0

5,0

10,0

15,0

20,0

25,0

2007 1 4 7 10

2008 1 4 7 10

2009 1 4 7 10

2010 1 4 7 10

2011 1 4 7 10

2012 1 4 7 10

2013 1 4 7 10

2014 1 4

Yearly Monthly

Monthly Industrial Production*

* Calculated from the 2010-based industrial production index. Yearly growth is calendar adjusted, monthly growth

seasonally and calendar adjusted,

Meanwhile, we find quite optimistic to wait for a significant decline in inflation in the future months, considering the volatile path of the oil and food prices and the ongoing rise in FX rates. For this reason, we do not anticipate that CPI inflation can fall below 8.5% at the end of the year in the present circumstances. Industrial production rose by 4.6% in April…

Growth in industrial production continued in April. Industrial production rose by 4.6% compared to the same month of the previous year according to the calendar-adjusted production index. Production increased at the same rate according to the non-adjusted figure. The rise was 5.1 % in both indices for the first four months of the year. Finally, production rose by 1% in April compared to the month before according to the seasonally and calendar-adjusted index.

The strongest production increase in April compared to the same month of the previous year according to the calendar-adjusted index was in the energy with 6.3%. This was followed by the capital goods sector with a rise of 5.7% and by 4.5% in the intermediate goods sector. Production also rose by 4.1% in the non-durable consumer goods sector. However, production has declined in the durable consumer goods sector by 0.4%. The rise in production in April was 9.3% in the mining sector, 5.8% in the electricity, gas and water and by 4.2% in the manufacturing sectors.

Consequently, April figures show us that industrial production growth is still strong in the beginning of the second quarter. Growth is robust especially in the energy and the capital goods sectors. On the other hand, there was an increase in the monthly production in contrast of the last two months. The growth in the industrial production for the first four months of the year has exceeded 5%. The successful performance in the exporting sectors positively affects the production. The first leading indicators related to May confirm that the growth trend in the industry will continue with the support of the exporting sectors albeit at a slower rate.

Foreign trade deficit was USD 31.6 billion in January-May 2014... The improvement in the foreign trade has continued in May and the trade deficit fell compared to the same period of the previous year. The gold imports were higher than the exports in this month, although they were less than the same month of the previous year. The foreign trade deficit in May was USD 7.1 billion with 28.7% decrease compared to the same month of the previous year. Exports rose by 3.6% to USD 13.75 billion while imports decreased by 10.3% to USD 20.86 billion. According to the calendar and seasonally adjusted index, exports increased by 0.3%, while imports rose by 2.9% compared to the previous month.

9

MONTHLY FOREIGN TRADE

(USD BILLION)

0

5

10

15

20

25

2007 1 5 9

2008 1 5 9

2009 1 5 9

2010 1 5 9

2011 1 5 9

2012 1 5 9

2013 1 5 9

2014 1 5

Exports Imports

50

75

100

125

150

175

200

225

250

275

2007 1 4 7 10

2008 1 4 7 10

2009 1 4 7 10

2010 1 4 7 10

2011 1 4 7 10

2012 1 4 7 10

2013 1 4 7 10

2014 1 4

Exports Imports

ANNUAL EXPORTS AND IMPORTS

(USD BILLION)*

* 12-months moving sums

Exports rose by 7.4% in the January-May period to reach USD 67.4 billion from USD 62.7 billion; while imports fell by 5.6% to 99 billion from USD 104.8 billion in the same period of the previous year. The foreign trade deficit also fell by 24.9% to USD 31.6 billion from USD 42.1 billion. The foreign trade deficit dropped to USD 89.4 billion as well, in yearly cumulative terms. The share of both the exports and imports towards the EU countries increased in January-May 2014, compared to January-May 2013. The exports to the EU countries rose by 13.9% to USD 28.9 billion. Imports from these countries fell by 1.6% to USD 36.8 billion. The share of the EU countries within the total exports was 42.9%, whereas the same share was 37.2% for imports. Exports towards the Middle East and Africa have stagnated in this period. The share of the exports towards Middle Eastern countries which was 23.9% in January-May 2013 fell to 22.4% in January-May 2014. Exports towards these countries rose by 0.6%. Exports towards African countries fell by 3.0%, while their share fell to 9% from 10% within the total exports. On the other hand, the first destination of exports was Germany with USD 6.4 billion, Iraq was the second country of destination and United Kingdom was the third. The first country for imports was Russia with USD 10.9 billion, followed by China and Germany in the first five months of the year.

Motor vehicles were the largest export items in the January-May period with USD 7.8 billion rising by 12.6% compared to same period of the previous year. Boilers-machinery and mechanical appliances, iron-steel, knitted goods and articles and electrical machinery and equipment were the other large export items. Export of precious metals increased by 17.7% in this period. Meanwhile, the largest import item was mineral oils and fuels with an import bill of USD 22.8 billion in the same period, despite a decrease of 0.5% as compared to January-May 2013. Boilers-machinery and mechanical appliances, iron-steel, electrical machinery and

FOREIGN TRADE DEVELOPMENTS

(USD Million)

May 2013

(I)

May 2014 (II)

(%) Change

(II)/(I)

Jan.-May 2013 (III)

Jan-May 2014 (IV)

% Change (IV)/(III)

Export 13,277 13,750 3.6 62,735 67,391 7.4

Import 23,245 20,859 -10.3 104,827 99,905 -5.6

Trade Balance -9,968 -7,108 -28.7 -42,093 -31,613 -24.9

Export//Import (%)

57.1 65.9 - 59.8 68.1 -

10

equipment, plastics and motor vehicles were among other major import items. There was 70.7% decrease in the imports of precious metals. In this light, gold imports fell to USD 1.9 billion, while exports rose to USD 2.6 billion. On the other hand, imports of consumption goods fell by 4.2%; the drop was 6.6% in intermediate goods and 0.4% in capital goods imports. Current account deficit was USD 16.4 billion in the January-April period... The current account deficit fell to USD 4.8 billion in April 2014 from USD 8.1 billion in April 2013. The improvement in the current account deficit is due to the fall in imports and the surplus realized in the gold trade in contrast of last year. On the other hand, the current account deficit fell to USD 16.4 billion from USD 24.7 billion in the first four months of the year. The cumulative deficit also fell to USD 56.8 billion from USD 60.1 billion registered in March. The foreign trade deficit and the outflow from the income balance were instrumental in the current account deficit in the January-April period. The tourism revenues slightly rose in this period. The trade deficit was USD 17.4 billion in January-April 2014; it was USD 25.6 billion in January-April 2013. The deficit in the gold trade turned to a surplus of USD 1.3 billion in this period. The service surplus reached USD 3.9 billion, while net tourism revenues amounted to USD 4.2 billion increasing by 1.7% compared to the same period of the previous year. The balance of income was in deficit with an outflow of USD 3.1 billion. The inflow from the current transfers reached USD 172 million. On the financing side, the capital inflows which were USD 43.7 billion in January-April 2014 fell to USD 8.4 billion in the same period of 2014. There was an increase of 48% in the direct investments. The net direct investments which were USD 2.6 billion in January-April 2013 rose to USD 3.8 billion this year. On the other hand, the real estate investments of non-residents reached USD 1.3 billion. Portfolio investment, which had resulted in a net inflow of USD 17.5 billion in January-April 2013, showed a net inflow of just USD 1.7 billion in January-April 2014. However, portfolio inflows have increased significantly in April compared to March. There was a fall of USD 729 million in the assets of the portfolio account which comprise of the securities transactions abroad of the residents. There was a net sale of USD 3.4 billion in the government debt securities in January-April 2014, despite a net purchase of USD 467 million in April. The bonds issued abroad by the government amounted to USD 2.28 billion in the four months period with the USD 1.39 billion bond issued in April. On the other hand, there was a net purchase of USD 987 million in the equity securities in the same period, after the purchase of USD 579 million registered in April. Meanwhile, while the bond issues abroad of the banks reached USD 2.1 billion, with the USD 1.7 billion bond issued in April; the bond issues of reached USD 496 million in the other sectors in the first four months of the year, after the first issue of the year amounting USD 500 million in April.

There was an inflow of USD 2.9 billion in the form of other investments in January-April 2014 compared to an inflow of USD 23.6 billion in January-April 2013. While the inflow of the corporate sector reached USD 1.49 billion in the form of deposits and loans; the banking sector registered a capital inflow of USD 2.62 billion. In this respect, the foreign deposits of the other sectors fell by USD 433 million, while the loans used reached USD 3 billion. The

11

(USD Million) Jan.-April

2013

Jan.-April

2014

CURRENT ACCOUNT -24,655 -16,372

Foreign Trade Balance -25,541 -17,402

Balance of services 3,369 3,990

Tourism income 4,110 4,178

Balance of Income -2,774 -3,132

Current Transfers 291 172

FINANCIAL and CAPITAL ACCOUNT 43,652 8,426

Direct Investments 2,586 3,832

Portfolio Investments 17,462 1,700

Other Investments 23,627 2,910

Central Bank -334 -508

General Government -733 -690

Banks 17,429 2,619

Other Sectors 7,265 1,489

NET ERRORS AND OMISSIONS -4,269 5,788

RESERVE ASSETS* -14,728 2,158

Official Reserves -14,297 2,158

Use of Fund Credit and Loans -431 0

government realized a USD 505 million net long-term loan repayment. Currency and deposits item, which is composed of the deposits of non-residents held with the resident banks, recorded a rise of USD 134 million. The banking sector cash loans utilizations amounted to USD 1.27 billion. The loans abroad of the banking sector fell by USD 67 million. On the other hand, banks’ currency and deposit placements abroad in the form of foreign exchange and Turkish Lira recorded a decrease of USD 1.15 billion. The roll-over ratio for long-term debt was 198% for banks and 143% for the non-bank sectors. In sum, while there was a deficit of USD 16.4 billion in the current account balance, the financial and capital account posted an inflow of USD 8.4 billion in January-April 2014. The net errors and omissions item registered a net inflow of USD 5.8 billion despite the outflow of USD 873 million registered in April. The Central Bank reserves fell by USD 2.2 billion in the first four months of the year, despite a rise of USD 2.7 billion realized in April. As a result, the reserve assets which rose by USD 14.7 billion in January-April 2013; decreased by USD 2.2 billion in January-April 2014.

Balance of Payments *Minus sign indicates an increase in reserves Consequently, the contraction in the current account deficit has continued in the January-April period. The fall in imports and the rise in exports with the help of the increasing gold exports were instrumental in the drop of the current account deficit. On the other hand, the portfolio investments, which declined in the first quarter of the year affected by the political and economic turmoil in Turkey, has turned to positive after the March 30 local elections. In addition, the increasing trend in direct investments continued in April. Furthermore, loan and deposit inflows of the banks and the private sector have also increased in April. Although there was an outflow from the net errors and omissions item in April; the cumulative contribution continued in the four months period. On the other hand, the decline in the Central Bank reserves has stopped in this month and the reserves started to rise as a positive development. As a result, while the contraction in the current account deficit continued, the

12

FOREIGN DEBT STOCK (USD BILLION)

0

30

60

90

120

150

180

210

240

270

300

330

360

390

420

19

99

20

00

20

01

20

02

20

03

20

04

20

05

20

06

20

07

20

08

20

09

20

10

20

11

20

12

20

13

20

14-1

Short Term Long Term Public Long Term Private

financing structure has improved in April. The same trend can continue in the following months, however, the improvement in the domestic demand as a result of the current and expected rate cuts from the Central Bank and the parallel possible rise in imports are the risks for the ongoing fall in the current account deficit. In addition, the recent chaos in Iraq can turn to a civil war which will certainly deteriorate the outlook of Iraqi-Turkish trade and Turkish investments in the country. Iraq is among the major trade partners of Turkey and a fall of the exports towards this country will certainly negatively affect the current account deficit. Moreover, the ending of the US Fed quantitative easing program as of the autumn months and the increasing signals of rate hike from the US economy will complicate the future outlook for the Turkish economy. Meanwhile, the rising domestic and foreign political problems of Turkey can be another handicap for the economy and financing the current account deficit.

Foreign debt stock was USD 386.8 billion in the first quarter of 2014... The foreign debt stock was USD 386.8 billion as of the first quarter of 2014. The debt stock was USD 388.1 billion in the end of 2013. The share of private sector debt is 68.5 percent with USD 264.9 billion and the share of public sector debt in total debt is 30.3 percent with USD 117 billion. Rest of the debt stock covers the external liabilities of the Central Bank with a portion of 1.3 percent corresponding to USD 4.9 billion. The external debt stock of central government was USD 86.5 billion as of the first quarter of 2014. USD 56.6 billion of the amount is the debt stock of bonds issued in the international financial markets. Other than the central government, the outstanding external debt of public institutions was USD 30.6 billion.

The short term private sector external debt was USD 106.1 billion. The share of banking sector in this amount was USD 70.7 billion. The long term external debt of private sector was USD 158.8 billion. Non-financial institutions had the biggest share in long term private sector external debt with USD 86.7 billion. Long term Central Bank’s external debt was USD 4.1 billion and short term liabilities was USD 762 million as of the first quarter of 2014.

The external debt stock of Turkey decreased by USD 703 million in total in the first quarter of the year compared to the previous quarter due to the exchange rate effects in the same period.

13

The budget registered a deficit of TL 2.8 billion in January-May 2014…. The budget gave a deficit in May amounting to TL 1.5 billion; compared to a surplus of TL 4.6 billion in the same month of 2013. The primary surplus increased to TL 8.6 billion as well from a surplus of TL 8.1 billion in May 2013. Despite the surplus realized in May, the increase in the expenditures is noticeable. In addition, personnel and social security expenditures have significantly increased in this month. Meanwhile, there was also a climb in interest expenditures, but this is mostly related to the maturity structure of the debt stock. On the other hand, on the revenues side the increase remained limited. While the income tax and corporate tax receipts increased in May, revenues from the special consumption tax and VAT from imports fell. The domestic VAT revenues almost did not change compared to the same month of the previous year. These negative results in taxes indicate that both consumption and imports are stagnant in May. The budget figures for January-May 2014 indicated that the budget which gave a surplus in the same period of last year, registered a deficit this year. While the budget deficit was TL 2.8 billion; the primary surplus was TL 22.1 billion. The budget had registered a surplus of TL 4.3 billion, while the primary surplus was TL 26 billion in the same period of 2013. The budget deficit was mainly originated by the faster increase in budget expenditures in contrast of the limited rise in the revenues. While there were increases in almost all non-expenditure items, there was also a rise in interest expenditures. On the other hand, the increases in the revenues were limited; there was almost no change in tax revenues on real prices compared the same period of the previous year. The total expenditures increased by 6.3% in real prices and they realized as TL 178.7 billion in January-May 2014. While the non-interest expenditures rose by 6.4% in real terms to reach TL 153.8 billion, the interest expenditures decreased by 5.7% to TL 24.9 billion. The current transfers rose by 3.6% in real terms. The social security institutions and health payments decreased in real terms to TL 28.2 billion, whereas the funds allocated to local administrations amounted to TL 14.6 billion and agricultural supports attained TL 5.9 billion.

The budget revenues rose by 1.9% in real terms in January-May 2014 to reach TL 175.9 billion. There was 6.9% increase in non-tax revenues in real terms, while the tax revenues climbed by only 0.6%. There was no change or reductions on real basis in the tax receipts other than banking and insurance tax, income tax, stamp duties and domestic VAT. The slowdown in the revenues from the main tax items can be evaluated as a signal for the sluggishness in domestic consumption and imports in the same period. The budget results related to the January-May period shows that although there was a significant rise in expenditures, the increase in revenues remained limited. The expenditures increased in recent months partly due to the local elections and there was a slowdown in tax revenues. As a result, the budget deficit increased. We expect that the rise in the budget deficit can go on in the following months if the same trend will continue. The climb in the expenditures can continue before the Presidential elections of August. There is no difficulty in attaining the year-end budget deficit targets; however, if the slow growth in domestic demand and the parallel negative performance in the revenues will continue in the future months, there can be difficulty in reaching these targets.

14

USD/TL

1,1

1,25

1,4

1,55

1,7

1,85

2

2,15

2,3

2,45

02.01.2006

10.03.2006

12.05.2006

17.07.2006

19.09.2006

24.11.2006

31.01.2007

04.04.2007

07.06.2007

09.08.2007

16.10.2007

24.12.2007

26.02.2008

30.04.2008

03.07.2008

04.09.2008

14.11.2008

23.01.2009

27.03.2009

03.06.2009

05.08.2009

09.10.2009

18.12.2009

22.02.2010

27.04.2010

30.06.2010

02.09.2010

11.11.2010

20.01.2011

24.03.2011

27.05.2011

27.07.2011

04.10.2011

12.12.2011

10.02.2012

13.04.2012

19.06.2012

23.08.2012

01.11.2012

04.01.2013

08.03.2013

14.05.2013

16.07.2013

23.09.2013

03.12.2013

05.02.2014

08.04.2014

13.06.2014

Central Administration Budget

*Rate of change in 12 months moving averages (%)

FINANCIAL MARKETS Markets in June…

The FX rates rose at the beginning of June due to the outflow from emerging markets; whereas there was a decline in interest rates as a result of the high demand to the Treasury auctions, expectations that the ECB will initiate new easing measures and the Turkish Central Bank will cut the rates in a similar move. The USD/TL parity rose to 2.10, while the FX basket of the TL was around 2.485. The compound benchmark interest rates of the February 24, 2016 bond went down to 8.4%. The USD/TL parity rose to 2.13 with the increasing criticisms of the Prime Minister Erdoğan

towards the Central Bank, while the interest rates also climb after the deterioration in the global markets despite the lower than anticipated May inflation figures. However, after the rate cut and the easing measures of the ECB both the FX and interest rates started to drop. The risk appetite towards the emerging markets significantly rose after the ECB decisions. Thus, while the USD/TL parity fell to below 2.10; the benchmark rates dropped to under 8.10%. The second week of the month was negative for the Turkish markets due to the attacks of the ISID militants in Iraq. The militants attacked also the Turkish Consulate in Mosul and took

Central Administration Budget January-May January-May Real* Budget 2014

(TL Thousand) 2013 2014 % change Realiz.(%) Budget Target

Expenses 155.267.305 178.686.265 6,3 40,9 436.432.901

1-Excluding Interest 133.500.643 153.794.968 6,4 40,0 384.432.901

Personnel 41.054.785 47.860.420 7,7 43,5 109.969.100

Govern. Premiums to Social Security Ag. 6.790.816 8.064.179 9,7 42,7 18.874.583

Good and Service Purchase 10.848.859 12.340.372 5,1 32,8 37.590.028

Current Transfers 60.548.793 67.881.558 3,6 41,5 163.553.913

Transfers to social security inst. 30.678.681 33.158.453 -0,1 43,0 77.059.462

Capital Expenses 8.832.510 10.408.528 8,9 28,4 36.688.695

Capital Transfers 1.350.025 1.976.987 35,3 30,3 6.518.197

Liability 4.074.855 5.262.924 19,3 68,8 7.645.162

Reserve Appropriation 0 0 0,0 - 3.593.223

2-Interest 21.766.662 24.891.297 5,7 47,9 52.000.000

Revenues 159.529.772 175.923.992 1,9 43,6 403.174.813

1-General Budget Revenues 153.959.417 169.158.573 1,5 43,0 392.967.693

Taxes 131.651.281 143.337.420 0,6 41,1 348.352.781

Non-Tax Revenues 22.308.136 25.821.153 6,9 44.614.912

Enterprise and Ownership Revenues 5.725.714 7.268.157 17,3 89,3 8.140.485

Grants and Aids and Special Reven. 584.053 895.266 41,6 57,5 1.556.477

Interest, Shares and Fines 10.664.366 13.665.482 18,4 52,5 26.025.984

Capital Revenues 5.282.875 3.258.691 -43,0 37,2 8.749.559

Receivable Collections 51.128 733.557 1225,6 515,1 142.407

2-Special Budget İnstitutions 3.915.690 4.961.525 17,1 68,7 7.222.934

3-Regularity & Supervisory Institutions 1.654.665 1.803.894 0,7 60,4 2.984.186

Budget Balance 4.262.467 -2.762.273 -159,9 8,3 -33.258.088

Balance Exclusive Interest 26.029.129 22.129.024 -21,4 118,1 18.741.912

15

EUR/TL

1,51,61,71,81,9

22,12,22,32,42,52,62,72,82,9

33,13,23,3

02.0

1.2

006

10.0

3.2

006

12.0

5.2

006

17.0

7.2

006

19.0

9.2

006

24.1

1.2

006

31.0

1.2

007

04.0

4.2

007

07.0

6.2

007

09.0

8.2

007

16.1

0.2

007

24.1

2.2

007

26.0

2.2

008

30.0

4.2

008

03.0

7.2

008

04.0

9.2

008

14.1

1.2

008

23.0

1.2

009

27.0

3.2

009

03.0

6.2

009

05.0

8.2

009

09.1

0.2

009

18.1

2.2

009

22.0

2.2

010

27.0

4.2

010

30.0

6.2

010

01.0

9.2

010

10.1

1.2

010

19.0

1.2

011

23.0

3.2

011

26.0

5.2

011

28.0

7.2

011

05.1

0.2

011

13.1

2.2

011

13.0

2.2

012

16.0

4.2

012

20.0

6.2

012

24.0

8.2

012

01.1

1.2

012

04.0

1.2

013

08.0

3.2

013

14.0

5.2

013

16.0

7.2

013

23.0

9.2

013

03.1

2.2

013

05.0

2.2

014

08.0

4.2

014

13.0

6.2

014

Benchmark 24.02.16 Bond Yields (Compound interest rates)

%

4

7

10

13

16

19

22

25

02

.01

.2

00

60

3.0

3.2

00

62

8.0

4.2

00

62

6.0

6.2

00

62

1.0

8.2

00

61

7.1

0.2

00

61

5.1

2.2

00

61

4.0

2.2

00

71

1.0

4.2

00

70

8.0

6.2

00

70

3.0

8.2

00

70

1.1

0.2

00

72

8.1

1.2

00

72

8.0

1.2

00

82

4.0

3.2

00

82

1.0

5.2

00

81

6.0

7.2

00

81

0.0

9.2

00

81

1.1

1.2

00

81

3.0

1.2

00

91

0.0

3.2

00

90

7.0

5.2

00

90

3.0

7.2

00

92

8.0

8.2

00

92

7.1

0.2

00

92

5.1

2.2

00

91

9.0

2.2

01

01

4.0

4.2

01

01

1.0

6.2

01

00

5.0

8.2

01

00

5.1

0.2

01

00

7.1

2.2

01

00

1.0

2.2

01

12

9.0

3.2

01

12

4.0

5.2

01

11

9.0

7.2

01

11

6.0

9.2

01

11

6.1

1.2

01

11

1.0

1.2

01

20

7.0

3.2

01

20

7.0

5.2

01

20

2.0

7.2

01

22

9.0

8.2

01

23

0.1

0.2

01

22

5.1

2.2

01

22

0.0

2.2

01

31

7.0

4.2

01

31

4.0

6.2

01

31

4.0

8.2

01

31

0.1

0.2

01

31

2.1

2.2

01

30

7.0

2.2

01

40

4.0

4.2

01

40

4.0

6.2

01

4

hostage 80 Turkish citizens, the Mosul Consul among them. The Turkish Lira rapidly depreciated against the US dollar with the parity reaching 2.13, while the benchmark interest rates rose to above 8.30%. The rise in oil prices negatively influenced the Turkish markets as well.

The pressure upon the Turkish Lira continued in the middle of the month and the USD/TL parity went up to 2.14. However, the statements of the Central Bank Governor Erdem Başçı concerning that a prospective rate cut will be gradual and measured limited the depreciation of the TL. The parity soon dropped to around 2.13, while the FX basket of the TL was near to the level of 2.51. Meanwhile, the benchmark interest rates climbed to 8.5% after the comments of Başçı and the negative mood in the global markets. The anxieties that the US Fed will hike its policy rate in an earlier than

expected time, also hit the Turkish markets parallel to the rise of the US dollar in the global markets. The USD/TL parity surged to 2.15, while the interest rates rose to 8.60%. However, the markets were calmed after the market-friendly announcement of the Fed, and both the FX and interest rates slightly fell. On the other hand, the tension rose in the markets with the increasing geopolitical risks related to Iraq and the ongoing chaos in Ukraine, both causing an increase in oil prices. Both the FX and interest rates rose again especially due to the events in Iraq which has close trade and economic relations with Turkey and is a neighbouring country.

The Central Bank cut the policy rates to 8.75% from 9.5% in its Monetary Policy Committee (MPC) meeting on June 24, as expected in the markets after the statements of Governor Başçı in the beginning of the month. The Bank did not change the interest rate corridor taking a cautious stance. However, the Prime Minister and some ministers of the government were not satisfied again with this rate cut, desiring a stronger decline in interest rates and continued to harshly criticise Mr. Başçı and the Bank. The benchmark rates fell to 8.25% after the Central Bank decisions, however, the

statements of some Fed governors concerning that the Fed can increase rates by the first quarter of 2015, limited the decline in Turkish rates. The Turkish Lira also slightly appreciated against the USD and euro. The US dollar was already negatively affected by the lower than expected first quarter GDP figures of the USA. Thus, the USD/TL parity dropped to 2.12 at the end of the month, while the FX basket of the TL closed the month at the level of 2.50. The total domestic borrowings of the Treasury reached TL 12.1 billion, while it repaid TL 16.9 billion in June.

16

Consequently, while the USD/TL rose to the level of 2.1264 in June from 2.0954 at the end of May; the EUR/TL parity increased to the level of 2.9032 from 2.8522. On the other hand, the average compound interest rate of the benchmark bond fell to 8.25% at the end of June from 8.53% at the end of May.

The domestic borrowing program of the Treasury for July 2014 – September 2014 … The Treasury has disclosed its domestic borrowing program for the July – September period. In July, domestic debt redemption is projected as TL 14.8 billion, while domestic borrowing is projected as TL 11.5 billion. In August, domestic debt redemption is planned as TL 12.3 billion, while domestic borrowing is projected as TL 9 billion. In September, domestic debt redemption is envisaged as TL 13.1 billion, while domestic borrowing is projected as TL 10 billion.

Expectations for July… Global markets are rather calm at the beginning of July after the disclosure of the non-farm payroll figures in the US and the monetary policy meeting of the ECB. The US employment data was better than expected and revealed that after the contraction of the GDP in the first quarter, the US economy is on the way of recovery. However, the risk appetite towards the emerging

FOREIGN EXCHANGE RATES (1)

31.12.13

(2) 30.05.14

(3) 30.06.14

(3)/(2) %change

(3)/(2) real % change

(3/(1) %

change

(3)/(1) % real change

USD/TL* 2,1343 2,0954 2,1264 1,5 1,2 -0,4 -5,7 Euro/TL* 2,9397 2,8522 2,9032 1,8 1,5 -1,2 -6,6 FX basket** 2,5370 2,4738 2,5148 1,7 1,3 -0,9 -6,2 Euro/USD rate 1,3774 1,3612 1,3653 0,3 - -0,9 * CB’s selling rate. ** 0.5 USD + 0.5 euro. *** The real change has been calculated using the CPI.

17

markets is deteriorated with the anxiety that the Fed will hike the rates earlier than expected in 2015. On the other hand, after cutting the policy rate in June and deciding to new monetary easing policies, the ECB has convened at the beginning of the month. While the Bank did not change the rates, President Draghi gave details about new LTRO funds dedicated to the use of the Euro Region banks. After these developments, we observe that the euro/USD parity went down to below the level of 1.36. Now the global markets wait for the speeches of the Fed Governor Yellen at the end of the month and the Jackson Hall meetings of the top world central banks in the beginning of August for more concrete analysis about the future global monetary policies. Meanwhile, while the Chinese economy shows sign of reacceleration, the Japanese economy is expected to contract in the second quarter. The GDP growth in Russia will be also slow this year. Another negative development came from Argentina which is on the verge of default as the government cannot pay its bond repayments. On the other hand, the geopolitical developments are quite alarming in the world, at least in the regions surrounding Turkey. The situation in Iraq turned to a civil war between the government forces and ISIL militants establishing a new Islamic state between Iraq and Syria. In the meantime, the civil war in Ukraine is continuing between the government forces and the insurgents. Accordingly, gold prices which rose as a result of geopolitical risks in June, came back recently due to the rise in the US dollar. Oil prices which also surged in June due to the conflict in Iraq went down in recent weeks as well. However, as the geopolitical risks remain, the oil and gold prices are expected to be volatile in the future months. The price of Brent oil hovers around USD 110 per barrel and the price of the US crude is around USD 103.50. The gold price is around USD 1320 per ounce as of the beginning of July. The euro/USD parity is at the level of 1.36; while the USD/JPY parity is around 101.65. In Turkey, economic growth was stronger than expected in the first quarter of the year, although it is expected to decelerate at the subsequent quarters. Foreign trade deficit continued to decline. Inflation went down slightly in June however it is still well above the Central Bank forecasts. Despite this fact, the Central Bank decreased its policy rate in June and is expected to continue in this month mostly due to the ongoing political pressure. We still think that to continue to cut rates will be a riskier choice for the Turkish Central bank considering the high inflation, negative geopolitical outlook and the uncertainty in global monetary policies, especially the increasing rate hike signals from the US economy. Furthermore, a new rate cut will certainly weaken the Turkish Lira. On the other hand, the candidates for Presidency were disclosed and the political campaign was launched for the Presidential elections of August 10. The surveys indicate that the chance of the Prime Minister Tayyip Erdoğan to be elected as the President of Republic is quite high. In case of the election of Mr. Erdoğan, the new debate will be about the new AKP Prime Minister and the formation of the government which can create extra uncertainties for the markets. Consequently, if there will be no major reversal in the risk appetite towards the emerging markets, we expect that the Turkish markets will remain calm ahead of the Presidential elections of August. The major risks can came from the possible escalation of the conflict in Iraq, which will have both political and economic effects and the ongoing chaos in Ukraine. On the other hand, we anticipate that the Central Bank can continue to cut rates, despite the possible negative consequences. As a result, we envisage that the USD/TL parity will oscillate around 2.12-2.16. On the other hand, the average compound benchmark rates can move within a band of 8.20-8.60% in July.

18

DISCLAIMER: This document is prepared by the Economic Research Section of Turkland Bank A.Ş (T-Bank) solely for information purposes by using official data and is not in any way intended as a professional advice related to subject thereof. Although utmost care has been taken in their compilation and processing, no responsibility is assumed or no warranties, explicit or implicit, are made for the accuracy or completeness of the information provided in the document, no liability and/or indemnification obligation shall be borne by. T-Bank vis-à-vis any recipient of the present document or any third party as to the accuracy, completeness and/or correctness of any information covered in the document or as to the usage of the information for commercial purposes. T-Bank accepts no responsibility also for the damages or loss to be incurred as a consequence of an investment made relying on the information in the present document. There may also appear opinions, which are of non-factual nature and subject to change without notice for which T-Bank can in no circumstances be held responsible.

Economic Research Section: Dr. Veyis Fertekligil Chief Economist, E-mail:veyis.fertekligil@tbank.com.tr Phone: 90/212 – 368 35 20 Fax:90/212 – 368 34 35

mailto:veyis.fertekligil@tbank.com.tr