FROM THE ECONOMIST INTELLIGENCE UNIT

OVERVIEW: The Economist Intelligence Unit believes that the Justice and Development Party (AKP) government, led by the prime minister, Recep Tayyip Erdogan, will stay in power until the next election is due in late 2007. EU accession negotiations, which were officially opened on October 3rd, will not be easy. Despite some slippages and delays, we expect that Turkey will adhere in broad terms to the three-year IMF stand-by agreement signed in May 2005, which envisages, among other things, continued tight fiscal policy, state-bank restructuring, and privatisation. In 2006 we expect a fall in the value of the Turkish lira to lead to slightly higher inflation and GDP growth of about 3.5%, down from about 5% in 2005. A pick-up in domestic demand and strong exports should result in higher growth in 2007. The predicted slowdown in 2006 should help to reduce the current-account deficit from about 6.5% of GDP in 2005 to a more sustainable 3-3.5% in 2006-07.

Domestic politics: We expect the AKP government, led by Mr Erdogan, to remain in power up to and beyond the next general election due in November 2007. Despite several defections, mainly in the first half of 2005, the AKP still has a large majority with almost two-thirds of the 550 seats in parliament, and Mr Erdogan retains substantial public support.