15 Apr 2014

Global Flows in a Digital Age: How Trade, Finance, People, and Data Connect the World Economy

By McKinsey Global Institute

The global web of economic interconnections between countries and companies is growing ever larger and more complex. Yet often the public discussion focuses on narrow metrics, such as exports, or individual flows such as cross-border financial flows or immigration. Much less research has been done to analyze the comprehensive web of cross-border interactions that increasingly characterize our world. This report contributes to addressing that gap.

In this report, the McKinsey Global Institute and the McKinsey High Tech Practice examine the evolution of global flows of goods, services, finance, people, and the data and communication flows that underlie the others. We compiled a comprehensive dataset on the inflows and outflows in each of the five categories for 195 countries from 1990–2013, drawing on both public and proprietary data sources. We focus specifically on how two major forces are shaping global flows: the shift in the weight of the global economy toward emerging economies, and the spread of digital technologies and Internet connectivity…

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Bank of China (Hong Kong) | 18 Aug 2014

Development of Hong Kong’s Offshore RMB Market and Its Prospects

I.      The characteristics of Hong Kong’s offshore RMB market: policy-driven and market oriented

Looking back at the progress over the last ten years, evidently, Hong Kong’s offshore RMB market featured being both policy-driven and market-oriented. Since the People’s Bank of China gave the green light to overseas RMB businesses in 2003, every milestone achieved in market development has been closely connected with the relaxation of relevant regulations in Mainland China: In January 2007, the People’s Bank of China began to allow qualified domestic financial institutions to issue RMB-denominated bonds in Hong Kong. Since 2009, the Ministry of Finance has been issuing RMB sovereign bonds in Hong Kong, which led to the development of the local dim sum bond market. In July 2009, the launch of cross-border RMB trade settlement ushered in a second phase of RMB businesses in Hong Kong. In August 2011, the RMB trade settlement program was expanded to cover all Chinese territories. RMB businesses in Hong Kong were also extended from individuals to corporations and institutions. In 2011, the Chinese government implemented the RQFII program, which allows qualified foreign investors to invest in the domestic securities market. Since March, 2013, all financial institutions that are registered in Hong Kong or operate mainly in Hong Kong are qualified for the RQFII program. More importantly, the RMB capital flows have shifted from one-way flow back to the Mainland to flows in both directions, which represents a major step forward in the process of RMB internationalization. Hong Kong becomes a pioneer and center for global RMB product engineering and trading.

The development of offshore RMB market is highly dependent on market demand for RMB products. The demand of RMB products and transactions has been rising in recent years and expanding globally. Hong Kong has shown its first-mover advantage in breadth and depth over other offshore RMB markets on the basis of the amount of daily transactions and the variety of product choices, creating a virtuous cycle of demand and supply that leads to further expansion. RMB trade settlement processed by Hong Kong banks jumped from 369.2 billion Yuan in 2010 to 3.841 trillion Yuan in 2013 for an increase of over 10 times. As of the end of 2013, there were nearly 4.5 million RMB deposit accounts in Hong Kong, averaging 191,400 Yuan per account. By the end of 2013, Hong Kong had amassed the largest RMB pool of 1.053 trillion Yuan outside the Mainland, 191.3 billion Yuan of which being certificates of deposits. RMB deposits in Hong Kong’s banking system account for about 60% of the global total. The outstanding amount of Dim Sum bonds rose from 55.8 billion Yuan at the end of 2010 to 310 billion Yuan at the end of 2013 for an increase of 460%, propelling Hong Kong to become the largest offshore RMB bond market.

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Hong Kong Export Credit Insurance Corporation | 30 Sep 2014

Indonesia – Economy Driven by Strong Consumer Spending

Highlights

Political	Joko Widodo, the governor of Jakarta, won in the presidential election held in July He has promised to phase out fuel subsidy and boost infrastructure investment A fragmented parliament could slow the legislative process and hinder reforms
Economic	Over the past decade, Indonesia has registered steady economic growth averaging 5.8% per year, mainly driven by private consumption Tighter monetary conditions weigh on consumer spending and investment in the short term Current account deficit has been a major concern of investors

Country Overview

Indonesia is an archipelago in Southeast Asia and Oceania. It is the fourth most populous country in the world. After the collapse of dictatorship in 1998, Indonesia has undergone reforms, transiting to democracy with greater regional autonomy. In 2004, the country’s first direct presidential election was held and political stability has since then been relatively stable. With a large domestic market, Indonesia is now the largest economy in Southeast Asia, and a member of the G-20 major economies. However, Indonesia remains a lower middle-income country as defined by the World Bank. A sizable population is still living below the poverty line.

Key Information
Capital	Jakarta
Population	250.8 million
Currency	Indonesian rupiah
Official language	Indonesian
Form of state	Republic

Major Merchandise Exports (% of total, 2013)	Major Merchandise Imports (% of total, 2013)
Mineral fuels and oils (16.5%)	Machinery (19.3%)
Fats, oils and waxes (12.8%)	Electrical equipment (12.9%)
Electrical equipment (7.0%)	Iron and steel (6.8%)
Top three export countries (% of total, 2013)	Top three import countries (% of total, 2013)
Japan (14.8%)	Mainland China (16.0%)
Mainland China (12.4%)	Singapore (13.7%)
Singapore (9.1%)	Japan (10.3%)

Source: Economist Intelligence Unit (www.eiu.com), Indonesia’s Ministry of Trade

Political Trend

In the presidential election held in July, Joko Widodo, the governor of Jakarta, defeated his only rival, former general Prabowo Subianto, by 53.15% to 46.85%. His policy agenda would be centered on fighting corruption and institutional reforms. He has also promised to phase out fuel subsidy and boost infrastructure investment.

In his five-year term beginning October, Widodo will face a fragmented parliament, however, could slow the legislative process and hinder reforms. Therefore, key to Widodo’s success will lie on whether he is able to build a strong cabinet and a cohesive coalition within the parliament.

On the world stage, Indonesia has become more prominent in recent years. It maintains close relationships with neighbors in Asia, and is a founding member of ASEAN and East Asia Summit (EAS). On the security front, separatism has long been one of the major threats in Indonesia. A process of decentralisation has been undergone, but armed resistances, albeit in lower intensity, have still been reported periodically.

Economic Trend

Economic Indicators	2011	2012	2013	2014^	2015^
Nominal GDP (USD bn)	845.9	876.7	868.3	849.6	1,006.2
Real GDP growth (%)	6.5	6.3	5.8	5.4	6.2
GDP per capita (US$)	3,440	3,530	3,460*	3,350	3,930
Inflation (%)	5.3	4.0	6.4	6.4	6.1
Budget balance (% of GDP)	-1.1	-1.8	-2.3	-2.3	-1.6
Current account balance (% of GDP)	0.2	-2.8	-3.4	-3.3	-3.0
External debt/GDP (%)	26.6	29.1	30.6*	33.0	29.8

* Estimates ^ Forecast
Source: Economist Intelligence Unit (www.eiu.com)

Over the past decade, Indonesia has registered steady economic growth averaging 5.8% per year. In the face of the global financial crisis, it has been relatively resilient thanks to conservative macroeconomic policy and low reliance on exports, which only account for about a quarter of GDP. However, concerns on the tapering of US monetary stimulus, Indonesia’s current account deficit and a dimmer growth prospect in major emerging markets have put pressure on the country’s balance of payments, pushing it into the first deficit since 2008. During the year, Indonesian Rupiah depreciated by about 21% against the US dollar.

In recent years, Indonesia current account deficit has been widening amid strong domestic demand which pushed up imports of capital goods, and of consumer goods for a burgeoning middle class. The authorities took steps to curb imports by restraining domestic demand. Indonesia’s central bank also raised its key interest rate by a total of 1.75% to 7.5% in the second half of 2013 in the wake of the currency slump and heightened inflationary pressure.

Notwithstanding the external imbalances, Indonesia’s economic growth remained robust in 2013. Private consumption was still the main driver of growth. In the short term, the effect of tighter monetary conditions would weigh on consumer spending and investment. In the first quarter of 2014, real GDP growth was 5.2%, the slowest in over four years.

Hong Kong - Indonesian Trade

ECIC Underwriting Experience

The ECIC imposes no restriction on covering Indonesian buyers. Currently, the insured buyers in Indonesia range from small and medium sized companies to manufacturing arms of foreign listed companies. For 2013, the number and amount of credit limit applications on Indonesia increased by 30.2% and decreased by 51.6% respectively, while insured business increased by 24.7%. Major insured products were watches and clocks (+421.2%), chemical products (+12.2%) and electronics (+1.2%), which represented 43.6% of ECIC’s insured business in Indonesia. The Corporation’s underwriting experience on Indonesia has been satisfactory, with one payment difficulty case of small amount reported from July 2013 to June 2014, involving cameras and optical goods.

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Hong Kong Export Credit Insurance Corporation | 30 Sep 2014

Sri Lanka – Twin Deficits Yet to be Solved

Highlights

Political	Government forces defeated the rebel Liberation Tigers of Tamil Eelam in 2009, ending a civil war which lasted almost thirty years The government prioritised economic development and national reconciliation to promote the country’s stability
Economic	Economic growth has been robust in recent years, with average annual growth of 7.5% from 2010 to 2013, supported by strong private consumption and investment Imbalances such as fiscal and current account deficits represent major challenges to macroeconomic stability

Country Overview

Sri Lanka is an island country located in the Indian Ocean in South Asia with multiple ethnicities. Tensions between the Sinhalese majority and Tamil minority in the northeast erupted into civil war. The government ended the war in 2009. Economically, Sri Lanka had been dependent on production and export of tea and rubber, while industry and services sectors combined now account for about 90% of GDP. Strong remittances from Sri Lankan workers abroad and economic development projects in areas previously suffered from civil war have contributed to the economy.

Key Data
Capital	Sri Jayewardenepura (Administrative) and Colombo (Commercial)
Population	21.1 million
Currency	Sri Lankan Rupee
Official language	Sinhala
Form of state	Republic

Major Merchandise Exports (% of total, 2013)	Major Merchandise Imports (% of total, 2013)
Textiles & garments (45.2%)	Mineral products (21.5%)
Tea (15.5%)	Machinery & transport equipment (21.2%)
Petroleum products (4.3%)	Cotton yarn and textiles (10.2%)
Top three export countries (% of total, 2013)	Top three import countries (% of total, 2013)
US (21.6%)	India (21.6%)
UK (8.3%)	China (17.7%)
India (5.3%)	Singapore (10.1%)

Source: Economist Intelligence Unit (www.eiu.com)

Political Trend

Sri Lanka is a republic governed by a presidential system. The president, Mahinda Rajapaksa of the Sri Lanka Freedom Party (SLFP), is more than halfway through his second six-year term. The United People’s Freedom Alliance, of which the SLFP is the main component, has a two-thirds majority in the parliament. Rajapaksa scrapped term limits for the presidency through a constitutional amendment in 2010, placing him a likely winner in the presidential election to be held in 2016. He has promised to focus on the economic development, in which improving business environment would be a priority. Meanwhile, the government has been pushing for national reconciliation. However, splits in Sri Lankan society are unlikely to be healed in the near term. Tensions between Sinhalese majority and Tamil minority remain a major social problem.

Economic Trend

Economic Indicators	2011	2012	2013	2014^	2015^
Nominal GDP (US$ bn)	59.2	59.4	67.2	73.8	82.1
Real GDP growth (%)	8.2	6.3	7.3	7.4	7.1
GDP per capita (US$)	2,830	2,810	3,160	3,440	3,800
Inflation (%)	6.7	7.5	6.9	4.1	5.1
Budget balance (% of GDP)	-6.9	-6.5	-5.9	-5.8	-5.7
Current account balance (% of GDP)	-7.9	-6.8	-4.0	-2.5	-2.5
External debt/GDP (%)	40.6	42.7	38.8*	36.5	34.3

* Estimates ^ Forecast
Source: Economist Intelligence Unit (www.eiu.com)

After the end of the civil war, Sri Lanka has seen robust economic growth averaged at 7.5% annually from 2010 to 2013, largely reflecting a “peace dividend”, and supported by strong private consumption and investment while public sector also contributed through infrastructure investment, including large-scale reconstruction projects in the North and Eastern provinces. In the face of US tapering, Sri Lanka has been relatively resilient. For the first quarter of 2014, real GDP annual growth remained strong at 7.6%.

Looking ahead, strong export growth aided by a recovery in advanced economies, higher investment and domestic consumption will continue to sustain a rapid economic growth.  However, Sri Lanka is still facing macroeconomic imbalances, such as the twin deficits – budget and current account deficits. Low tax revenues remains a concern. In response, the government has expanded the coverage of value-added tax and introduced further measures to expand coverage and lower the threshold for certain taxes on retail and wholesale trades in the 2014 budget.

On the bright side, Sri Lanka’s current account position has improved. Nevertheless, a sudden halt in capital inflows due to changes in foreign investors’ risk appetite or contagion after a general withdrawal of investors from emerging markets could reverse the apparently sustainable current account deficit.

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15 Oct 2014

A Blueprint for Addressing the Global Affordable Housing Challenge

By McKinsey Global Institute

Providing decent housing for citizens is a perennial challenge for nations around the world. From slum residents in the developing world to middle-income households in expensive global capitals, hundreds of millions of people struggle to find decent housing that they can afford without severe financial stress. The economic and human toll of the housing affordability gap is enormous. We estimate that 330 million households are affected around the world and, under current trends, by 2025 the number of households that occupy unsafe and inadequate housing or are financially stretched by housing costs could reach 440 million—or 1.6 billion people.

In this research we identify ways to narrow the affordable housing gap in the next decade. This will require clear aspirations by policy makers to improve housing affordability and the use of four levers that we identify to unlock land in appropriate locations, reduce construction and operations costs, and improve access to low-cost financing. Together with an integrated and city-specific delivery approach, these measures can put housing within reach of households making 50 to 80 percent of their city’s median income. The levers also can make housing more affordable and improve housing outcomes for households earning less than 50 percent of median income…

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15 Nov 2014

Southeast Asia at the Crossroads: Three Paths to Prosperity

By McKinsey Global Institute

The Association of Southeast Asian Nations (ASEAN) is a coalition of ten diverse nations: Brunei, Cambodia, Indonesia, Laos, Malaysia, Myanmar, the Philippines, Singapore, Thailand, and Vietnam. The region has posted strong growth since 2000, lifting millions out of poverty — but many gaps and disparities remain.

As Southeast Asia pushes to deepen its ties by completing the ASEAN Economic Community integration plan, the region is starting a new chapter in its economic development. But it will take the right set of catalysts to ignite more dynamic and inclusive growth. MGI’s analysis finds that global trade flows, urbanization, and disruptive technologies could provide the keys to unlocking the region’s full potential and creating wider prosperity…

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Knight Frank | 18 Dec 2014

Chinese Outward Real Estate Investment: After the Initial Waves, What's Next?

INTRODUCTION

There has been a tremendous surge in Chinese outward investment in overseas real estate in recent years. What first started as sovereign funds making exploratory investments has proliferated into buying sprees by Chinese developers, banks and institutional investors, such as insurance companies.

This surge has been fueled by a number of key domestic economic and policy factors. We argue that one the most powerful drivers has been the continued consolidation of China’s residential market. Fierce domestic competition, combined with government curbs on home purchases and rising borrowing costs over the past two years, has led to developers’ actively looking elsewhere for new opportunities. Government incentives, such as the relaxation of real estate investment regulations for insurance companies, have also resulted in billions of dollars in extra funding for overseas investment. Meanwhile, mature gateway markets in the UK, US and Australia, with their relatively stable economies, quality products and higher yield returns, continue to attract Chinese investors.

In this report, we focus on these push and pull factors, examining, in particular, issues such as the lasting impact the policy-driven Chinese market will have on outward-looking investors and gateway markets. We also shed light on the next wave of Chinese investors likely to make moves in offshore property markets. In addition we look at the diversification of investors as they move from core and development opportunities into other assets, as well as their move from gateway locations to other higher-yielding cities.

 

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Hong Kong Export Credit Insurance Corporation | 31 Dec 2014

Kuwait: Heavily Rely on the Oil Sector

Highlights

Political	Oil wealth helped Kuwait escape radical political upheaval brought across the Middle East by the Arab Spring However, tensions between the government and parliament have resulted in repeated early elections and cabinet reshuffle The emir holds firmly the power in its hands despite pressure for constitutional reforms
Economic	Proven oil reserves would last about 90 years at the current rate of production Economic growth has recently been constrained by subdued oil production and export growth Progress on economic diversification away from the oil sector has been limited

Country Overview

Kuwait is an Arab country at the tip of Persian Gulf, highly dependent on its oil resources. It has reserves of about 102 billion barrels - more than 6% of world reserves. Oil and gas sector has dominated the economy, making up about 60% of the country’s GDP and about 95% of export revenues. Thanks to its rich oil resources, Kuwait is among the most prosperous country in the world, with GDP per capita exceeding US$40,000. Kuwait has done little to diversify its economy, leaving the country exposed to external conditions. The political turmoil in Iraq and the rise of the extremist jihadi group also represent major concern for Kuwait’s security.

Key Data
Capital	Kuwait City
Population	4.0 million
Area	17,818 sq km
Currency	Kuwaiti dinar
Official language	Arabic
Form of state	Constitutional monarchy

 

Major Merchandise Exports (% of total, 2012)	Major Merchandise Imports (% of total, 2012)
Crude oil (93.3%)	Consumer goods (40.0%)
Non-oil (6.7%)	Intermediate goods (34.0%)
	Capital goods (23.0%)
Top three export countries (% of total, 2013)	Top three import countries (% of total, 2013)
South Korea (15.1%)	China (11.1%)
India (14.1%)	US (10.7%)
Japan (10.8%)	Saudi Arabia (8.0%)

Source: Economist Intelligence Unit (www.eiu.com)

Political Trend

Kuwait is a constitutional monarchy. Although there are no formal political parties, Kuwait has a strong electoral tradition, with a vocal single-chamber parliament made up of 50 members, which can reject government legislation. The current parliament is more balance between supporters and opponents of the government than its predecessor. However, persistent conflicts between the government and parliament could pose larger risks on political stability, and hinder structural economic reforms.

Given Kuwait’s relatively small size, strengthening political and economic ties with its five Gulf Cooperation Council neighbors will remain a key policy objective. Kuwait will seek to continue the policy of building strong bilateral relationships with major Asian powers such as China, Japan, India and South Korea, which are Kuwait’s main trading partners.

Economic Trend

Economic Indicators	2011	2012*	2013*	2014^	2015^
Nominal GDP (US$ bn)	155.0	174.9	173.5	177.3	183.6
Real GDP growth (%)	10.2	8.3	3.0	2.5	3.7
GDP per capita (USD)	41,940	45,750	43,760	43,330	43,510
Inflation (%)	4.8	3.3#	2.6	3.0	3.7
Budget balance (% of GDP)	29.8	25.9	26.0	25.1	22.4
Current account balance (% of GDP)	43.3	45.9	40.8	37.9	34.6
External debt/GDP (%)	24.1	20.2#	19.6#	18.7	19.1

#Actual  * Estimate  ^ Forecast
Source: Economist Intelligence Unit (www.eiu.com)

Kuwait’s oil reserves remain plentiful. It ranks first globally in per capita terms, with about 26,800 barrels per capita. At the current rate of production, proven oil reserves would last about 90 years. Substantial oil revenues have strengthened government finances significantly. Over the past ten years, Kuwait has recorded budget surpluses of 30% of GDP on average, current account surpluses averaged 35% of GDP, reducing the country’s vulnerability to external financial and economic risks to a very low level.

Looking ahead, a gradually rising oil production, and public and private consumption would support a higher growth of around 4% in the near term. However, risks remain predominantly on the downside, given the slower potential growth in advanced economies and emerging markets.

The government has announced a new five-year development plan, for 2015‑19, focusing on economic diversification and the implementation of several strategic mega-projects to boost investment. However, the plan still needs to be passed by parliament. Despite fiscal position is strong, spending rigidities on subsidies and pensions as well as rapid spending increase, which has trebled in the past decade, have also highlighted Kuwait’s fiscal risks.

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Hong Kong Export Credit Insurance Corporation | 31 Dec 2014

Poland: Actively Integrated with EU for Stability

Highlights

Political	Donald Tusk from the Civic Platform resigned from his position of Prime Minister in September, after being selected as next president of the European Council Major challenge for Ewa Kopacz, Tusk’s successor, is to deal with the different factions within the party before the next general election which is scheduled for late 2015
Economic	Polish economy has slowed markedly in the past two years – to only 1.6% in 2013 A continued economic decline in core euro area countries and rising geopolitical tensions represent major downside risks The Russian-Ukrainian conflict has prompted Poland to rethink its stalled euro adoption plan as deeper integration with EU may anchor stability

Country Overview

Poland is the largest country in Central Europe, in terms of both population and area. The accession to European Union (EU) in 2004 has further integrated its economy with Europe and the rest of the world. Helped by a relatively large domestic market, Poland was the only EU country to have avoided recession during the 2008 global financial crisis. Educated and competent human capital helps attract foreign direct investment (FDI) especially in the automotive, R&D, electronic and chemical sectors. Today Poland has joined the group of countries classified as high-income economies by the World Bank. However, its GDP per capita is at just about two-thirds of the EU average.

Key Information
Capital	Warsaw
Population	38.5 million
Area	312,685 sq km
Currency	Polish zloty
Official language	Polish
Form of state	Parliamentary republic

 

Major Merchandise Exports (% of total, 2013)	Major Merchandise Imports (% of total, 2013)
Machinery & transport equipment (34.0%)	Machinery & transport equipment (30.9%)
Manufactured goods (19.2%)	Manufactured goods (16.7%)
Food & live animals (9.5%)	Chemicals & chemical products (13.4%)
Top three export countries (% of total, 2013)	Top three import countries (% of total, 2013)
Germany (24.9%)	Germany (26.0%)
UK (6.5%)	Russia (10.0%)
Czech Republic (6.1%)	Netherlands (5.7%)

Source: Economist Intelligence Unit (www.eiu.com)

Political Trend

Poland is a parliamentary republic. Parliamentary elections are held at least every four years. After being selected as the next president of the European Council, Donald Tusk resigned from his position of Prime Minister in September, and was succeeded by Sejm speaker Ewa Kopacz.

Major challenge for Kopacz is to reconfigure the party and stitch together from various factions that often compete internally. Meanwhile, balancing the goal of public finance reforms and promoting economic growth remained the government’s priority.

In the wake of the Ukraine crisis, Poland has supported increased sanctions against Russia. Currently, Poland relies heavily on Russian natural gas – about 60% of gas demand has been secured by Russian deliveries. Although energy dependence on Russia is unlikely to be reduced in short term, moves to boost its defensive military capabilities have intensified. In early September, NATO agreed on the deployment of a 4,000-strong rapid reaction force to be based in Poland.

Economic Trend

Economic Indicators	2011	2012	2013	2014*	2015^
Nominal GDP (USD bn)	514.9	489.9	517.7	541.6	539.0
Real GDP growth (%)	4.5	2.1	1.6	2.7	3.3
GDP per capita (USD)	13,370*	12,720*	13,440*	14,070	14,040
Inflation (%)	3.9	3.7	0.8	0.2	1.2
Budget balance (% of GDP)	-5.0	-3.9	-4.0	-3.6	-3.0
Current account balance (% of GDP)	-5.3	-3.6	-1.4	-1.2	-1.9
External debt/GDP (%)	62.3*	74.6*	73.0*	73.1	71.7

* Estimates ^ Forecast
Source: Economist Intelligence Unit (www.eiu.com)

In Q2 2014, real GDP grew by 3.3% year-on-year, helped by supportive economic policies and improving conditions in main trading partners. However, the relatively swift pace of expansion observed in the first half of the year appears unlikely to be sustained in the second half. The fragile recovery of the euro area, the dampening effect the Ukraine crisis is having on regional activity, as well as the EU-Russia sanctions are all likely to have negative effect on growth in the second half.

In September, annual inflation rate remained negative for three consecutive months, mostly driven by falling food prices as Russian ban on food imports from the EU has created a domestic surplus in Poland. In an attempt to boost the economy and fight off the threat of persistent deflation, Poland’s central bank cut its benchmark interest rate by 0.5% to a record low of 2% in October.

Following Russia’s annexation of territory in Poland's neighbor Ukraine in March, the country’s political leaders had shown greater appetite on the accession to the euro, seeing it as an additional form of security because it would lock the country firmly into Europe's core. In June, Poland’s president, finance minister and central bank governor agreed that the issue of euro entry should be discussed after the general election next year.

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Hong Kong Export Credit Insurance Corporation | 31 Dec 2014

Turkey: Sacrificing Higher Growth for Lower Deficit

Highlights

Political	Recep Tayyip Erdogan, who has dominated Turkish politics as prime minister since 2003, has become the country’s first directly elected president He has vowed to move Turkey away from its parliamentary system toward a form of government with a more powerful president Prolonged turmoil in neighboring Syria and Iraq represent risk to Turkey’s stability
Economic	Economic growth has been moderating to between 3-4% in recent years, amid high inflation and geopolitical tensions Large current account deficit and its reliance on short-term financing leave the economy vulnerable to capital flows

Country Overview

Turkey, with a population of around 75 million, is situated at the junction of Asia and Europe. Turkey began to open up the economy in the 1980s, expanding production in the automotive, construction, and electronics industries beyond the traditional textiles and clothing sectors. Over the past decade, GDP per capita has nearly doubled and now exceeds US$ 10,000. Although growth has been promising, Turkey's relatively high current account deficit and its reliance on short-term financing leave the economy vulnerable to capital flows. On-going turmoil in neighboring Syria and Iraq, especially the rapid rise of the extreme jihadi group Islamic State (IS), also represents risk to the country’s stability.

Key Information
Capital	Ankara
Population	75.4 million
Area	783,562 sq km
Currency	Turkish lira
Official language	Turkish
Form of state	Republic

 

Major Merchandise Exports (% of total, 2013)	Major Merchandise Imports (% of total, 2013)
Textiles & clothing (18.1%)	Fuel (14.2%)
Transport equipment (12.0%)	Chemicals (13.3%)
Iron & steel (11.5%)	Machinery (9.3%)
Top three export countries (% of total, 2013)	Top three import countries (% of total, 2013)
Germany (8.8%)	Russia (10.0%)
Iraq (7.4%)	China (9.8%)
UK (5.6%)	Germany (9.6%)

Source: Economist Intelligence Unit (www.eiu.com)

Political Trend

In August 2014, Erdogan became the country's first directly elected president, by winning about 52% of the votes in the first round.

While his supporters say he has improved Turkey's economy and given a political voice to the country's conservatives, his critics accuse him of having Islamist leanings and an autocratic style. Externally, Turkey began accession membership talks with the European Union in 2005. However, progress has so far been limited amid opposition from countries like Germany, fearing that cultural differences will make it difficult to integrate.

Economic Trend

Economic Indicators	2011	2012	2013	2014^	2015^
Nominal GDP (USD bn)	774.6	789.1	820.1	796.6	857.6
Real GDP growth (%)	8.8	2.1	4.0	3.0	4.0
GDP per capita (USD)	10,470	10,560*	10,880*	10,480	11,180
Inflation (%)	6.5	8.9	7.5	8.9	7.4
Budget balance (% of GDP)	-1.4	-2.1	-1.2	-2.6	-2.7
Current account balance (% of GDP)	-9.7	-6.1	-7.9	-5.8	-6.0
External debt/GDP (%)	39.4	42.8	47.6	48.0	44.5

* Estimates ^ Forecast
Source: Economist Intelligence Unit (www.eiu.com)

Following a strong rebound in in the aftermath of the global financial crisis, the Turkish economy has been growing at a more moderate pace in recent years. While private consumption remained the major growth engine, high inflation and sluggish wage and employment growth have constrained household spending. In the second quarter of 2014, real GDP growth slowed to 2.1% year-on-year, in the wake of tightening fiscal and monetary conditions. It is expected growth would pick up next year, supported by stronger private consumption and investment.

The country’s chronic current account deficit reflects structural issues related to its heavy dependence on imported energy – almost all oil and gas were imported. Meanwhile, Turkey’s industry imports intermediate goods to produce final goods. The country’s current account deficit could only be narrowed at the expense of higher growth, if a significant change in its trade composition is not to happen. The Turkish government has introduced various measures to address the issue. However, the plan will not have an impact on Turkey’s energy dependency in the short term.

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