Standard & Poor’s not alarmed by forecast of 6-7 percent for Turkish inflation in 2007

ISTANBUL – Turkey will probably end 2007 with inflation of 6 to 7 percent, well above a central bank target of 4 percent, with elections likely to stir volatility in markets, a director for Standard & Poor’s credit rating agency said this week. But the outlook for inflation, which also ended 2006 way above target, should not be too harmful to Turkey’s credit rating, Farouk Soussa, S&P ratings director for the Middle East and Africa, told Reuters in an interview. «We expect inflation to end up at 6 to 7 percent and we don’t see this as terribly negative to the rating,» he said on the sidelines of a conference in Istanbul. «It is consistent with macroeconomic policies and disinflationary trends.» Inflation ended 2006 at almost 10 percent, above a central bank target of 5 percent. Soussa’s forecast is broadly in line with average expectations from the central bank’s latest survey of businesses and economists, which put the likely year-end inflation rate at 6.98 percent. He also said growth in real gross domestic product (GDP) was seen at 5 to 6 percent in 2007. The central bank survey predicted growth in real gross national product (GNP) would be 4.7 percent. Slowdown The government targeted 5 percent GNP growth in 2006, but the rate of growth slipped to 3 percent in the third quarter from 8.8 percent in the second. That slowdown was caused by a sharp rise in interest rates following a slide in the lira in May and June, as rising inflation and general emerging market unease scared investors from Turkish markets. Soussa said elections in European Union candidate Turkey this year – for president in May and parliament in November – were expected to prompt market volatility which would have a similar impact on the economy as last year’s fluctuations did. «We would expect the impact of the volatility (in 2007) on the economy to be similar to what happened in May and June. The economy will slow down slightly. We expect real GDP growth in 2007 to be 5 to 6 percent including the volatilty,» he said. Investors are concerned about growing tensions between the secular establishment and the Islamist-rooted ruling Justice and Development Party. Parliament chooses the president under Turkey’s constitution. Secularists fear PM Recep Tayyip Erdogan may run for the top job and then try to undermine the division of state and religion. Some economists are also concerned the government could relax spending in an election year, and Soussa said the agency was keeping a close eye on fiscal policy. «The most important parameter for the rating we are looking at is the government’s fiscal policies and continuing macroeconomic management, including the approaches to reforms in 2007,» he said. S&P revised Turkey’s outlook to stable from positive in June – the height of last year’s mini-crisis. Soussa said earlier that long delayed reform of Turkey’s social security system was key from a ratings perspective and said the system’s deficit – at 4.8 percent of output – was high.

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