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GENERAL OUTLOOK Outlook and Expectations for May:

The risk appetite in the global markets is rather high in the beginning of May although the geopolitical risks continue especially related to North Korea. The US dollar has slightly appreciated against the major currencies after the Federal Reserve (Fed) meeting of May 3, indicating that the Fed thinks that the slowdown in the US economy is temporary and a rate hike in June is approaching. The Fed voted not to raise its key interest rate, as central bank officials expressed concern with the pace of economic growth. The Fed, however, noted that it believes the weakness will not last, and gave no indication that it would alter its intentions to raise rates in the future. However, the uncertainties about the Trump administration decisions and implementations are preventing the US dollar to gain more strength in the markets. The revealed tax reform plan was found insufficient by the markets and its fate in the Congress is uncertain. The administration will also try to pass its new bill related to the health reform replacing the “Obamacare”. The Congress has reached a budget deal to avoid a government shutdown, but it allocates no cash for President Donald Trump's proposed US-Mexico border wall. The USD 1 trillion agreement to keep the US government running until 30 September was reached on last Sunday. While there was no money for a wall, Republicans managed to secure USD 1.5 billion in spending on border security. Lawmakers are expected to vote on the package in the coming days. Meanwhile, the recent US growth figures are not satisfactory and the markets are waiting for the non-farm payroll and employment data which will be disclosed tomorrow. On the other hand, in France the chance of Emmanuel Macron to be elected as the new French President is high in the next tour of the presidential elections on May 7. The euro can continue to appreciate after the election as Macron is a liberal politician who supports the European Union and the monetary union. Meanwhile, the European Central Bank (ECB) kept its stimulus program and interest rates unchanged in its April meeting, though it stated that the economy of the Euro Region is becoming stronger. The ECB has trimmed the bond purchases from 80 billion euros a month as of April to 60 billion euros. But it insists they will continue at least until the end of the year, and in any case until inflation shows signs of turning convincingly upward. On the other hand, the fund flows to emerging markets are continuing in the beginning of 2017 and these currencies recovered against major currencies this year. Despite the geopolitical risks in the world, data by the Institute of International Finance (IIF) showed that the emerging markets have witnessed fifth straight month of net 'non-resident' portfolio inflows in April, their

MAY 2017

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best run since the first half of 2015. However, the Fed policies, the new decisions of Trump administration and the possible normalization steps of the ECB can change the situation in the next months of the year.

The US dollar significantly depreciated against the euro, while it appreciated against the Japanese Yen on a monthly basis. The euro/USD parity is around 1.0925, while the USD/Yen parity is at the level of 112.95.

The oil prices decreased on a monthly basis as there are doubts about the

extension of the OPEC agreement related to oil production cuts. The price of Brent oil is around USD 50.15 per barrel, while the price of the US crude oil is around USD 47.20 as of the beginning of May

The gold prices which rose significantly in April due to escalating global geopolitical risks, decreased in the beginning of May. The gold price was around USD 1232 per ounce as of the beginning of the month.

In Turkey, the macro figures are not very optimistic. The May CPI inflation has reached

%11.9 which is the highest level in 9 years. The foreign trade deficit increased to USD 12.5 billion in the first quarter of the year from 12.1 billion in the same period of last year. Although there is some recovery in March and April according the leading indicators, the industrial production is still slow in the first two months of the year (1% growth in February). The unemployment rate surged to 13% in the January period, the highest level since 2010. Finally, the budget deficit reached TL 15 billion in the first quarter of the year, with the recent government’s tax cut measures to stimulate the economy.

The Turkish markets have welcomed the result of April 16 referendum. The markets evaluated the result as a sign of stability. Thus, while the Turkish Lira strengthened, the Borsa Istanbul rose and the interest rates fell down. The USD/TL parity went down to below 3.60, especially after the surprising rate hike decision of the Turkish Central Bank in late April. The Bank increased its late liquidity window rate to 12.25% from 11.75%. There was also a decline especially in the ten-year bond interest rates which fell to around 10.40%. However, the decline in the two-year bond rates was limited and they went down to 11.20%, but increased again to above 11.30% with the high inflation numbers. We can say that although the political risks in Turkey have somewhat abated for the medium-term, the sluggish growth in the economy and the high inflation rate and rising unemployment are source of concerns for this year.

Consequently, we think that if the risk appetite will continue to increase in the global markets, the USD/TL parity can stay in the band of 3.50-3.55 in the period ahead. The possible victory of Macron in France will certainly increase the risk appetite next week and the Turkish market will probably profit from this mood. However, a fall in the risk appetite, a re-strengthening in the US dollar in the global markets and a possible escalation in the geopolitical risks in Turkey can change this outlook. The tense Turkey-EU relations are also creating new risks for the Turkish economy. On the other hand, as the inflation rate is in its highest level in nine years, we do not think that the interest rates can change much in the short-term period.

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Economic Developments: Turkish Central Bank hiked late liquidity window rate… The Central Bank hiked its late liquidity window (LLW) lending rate by 0.50 percentage points on April 28 and left all other key rates on hold, according to a statement from the bank. "Late liquidity window interest rates (between 4.00 p.m. – 5.00 p.m.): Borrowing rate has been kept at 0 percent, while lending rate has been increased from 11.75 percent to 12.25 percent," the bank said. The overnight lending rate -- the rate banks use to borrow from the Central Bank overnight -- was kept at 9.25 percent. The overnight borrowing rate, under which banks lend or deposit money to the Central Bank, also remained unchanged at 7.25 percent. The one-week repo rate, known as the policy rate, was also kept at 8 percent, the statement said. The bank said recent data indicates a gradual recovery in economic activity with the back of increasing EU demand for Turkish exports and recovering in domestic demand. "With the supportive measures and incentives provided recently, economic activity is expected to gain further pace in the forthcoming period. The committee assesses that the implementation of the structural reforms would contribute to the potential growth significantly. "Cost push pressures and the volatility in food prices in recent months have led to a sharp increase in inflation. Although the recent improvement in the risk appetite contains some of the upside pressures from cost factors, current elevated levels of inflation pose risks on the pricing behaviour," the bank added. The bank said the committee decided to strengthen the monetary tightening in order to contain deterioration in the inflation outlook. The bank vowed it would continue to use all available instruments in pursuit of its price stability objective. "Tight stance in monetary policy will be maintained until inflation outlook displays a significant improvement. “Inflation expectations, pricing behaviour and other factors affecting inflation will be closely monitored and, if needed, further monetary tightening will be delivered," the bank said. Turkish Central Bank raised inflation forecasts… Turkey’s Central Bank raised its inflation forecasts for this year and 2018 on April 28, saying it was ready to tighten policy further if needed, while adding that it was confident its recent steps would start to bear fruit in the months ahead. At a quarterly presentation of its inflation report, the Bank raised its mid-point forecast for inflation at the end of 2017 to 8.5 percent from a previous forecast three months ago of 8 percent. It lifted its forecast for the end of 2018 to 6.4 percent from 6 percent and predicted that the rate would stabilize around 5 percent in the medium-term. Governor Murat Çetinkaya said monetary policy would remain tight until there was a significant improvement in the inflation outlook. He said the Bank’s sharp monetary tightening since January would start to impact inflation over time. “The Central Bank has implemented a strong monetary tightening since January to contain the deterioration in the inflation outlook,” the Bank said in written highlights of Çetinkaya’s comments. “The first impacts of the monetary tightening appeared in financial indicators, whereas its lagged effects on inflation will be observed in time. Inflation is expected to fall in the upcoming months,” he added. Risks to food inflation – another major determinant of inflation forecasts – are, however, considered to be on the upside, according to the Bank’s report. Çetinkaya said the recent rapid rise in inflation meant price behaviour would need to be closely monitored and that the Bank would use all available instruments and tighten policy further if necessary. But he vowed there would be no immediate moves. Economic

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activity was expected to gain pace in the second quarter, he said, and forecast that the contribution of exports to growth would increase thanks to stronger external demand. The IMF downgraded its growth forecast for Turkey… The IMF downgraded its 2017 growth forecast for Turkey to 2.5 percent from 2.9 percent, while it kept 2018 forecasts unchanged at 3.3 percent, in its latest World Economic Outlook released on April 18. The Fund raised its 2017 forecast for the global economy, while also warning about rising protectionism. “In Turkey, after a sharp slowdown in growth in the third quarter of 2016, a modest acceleration in activity is projected, with growth reaching 2.5 percent in 2017 based on stronger net exports and a moderate fiscal stimulus,” stated the IMF. The outlook is clouded by heightened political uncertainty, security concerns, and the rising burden of foreign-exchange-denominated debt caused by the lira depreciation, according to the IMF. The IMF raised its 2017 global growth forecast due to manufacturing and trade gains in Europe, Japan and China, but warned that protectionist policies threaten to choke off a broad-based recovery. The IMF forecast in its latest World Economic Outlook that the global economy would grow 3.5 percent in 2017, up from its previous forecast of 3.4 percent in January. However, it also warned about rising protectionism. The Fund said chronically weak advanced economies are expected to benefit from a cyclical recovery in global manufacturing and trade that started to gain momentum last summer. The IMF lifted Japan’s 2017 growth projection by 0.4 percentage point from January, to 1.2 percent, while the euro-zone and China both saw a 0.1 percentage point growth forecast increase to 1.7 percent and 6.6 percent, respectively. Meanwhile, the IMF held its 2017 U.S. growth forecast steady at 2.3 percent, which still represents a substantial jump from 1.6 percent growth in 2016, partly due to expectations that President Donald Trump will cut taxes and increase government spending. The IMF also revised Britain’s growth forecast to 2.0 percent for 2017, up a half percentage point from January. Moody’s revised up growth forecast for Turkey… Moody’s has revised up its 2017 and 2018 growth forecasts for Turkey following a stronger-than-expected 2016 growth data, but added that Turkey’s economic rebound would unlikely last without the realization of key structural reforms. In its latest credit outlook, which was published on April 10, the rating agency said it revised up its growth forecast following the release of the fourth-quarter GDP data to 2.6 percent from a previous 2.2 percent in 2017 and to 2.9 percent from a previous 2.7 percent in 2018. “Consumer prices are rising much faster than producer prices, suggesting that the causes of the inflation spike are not solely tied to the depreciation of the Turkish Lira,” it added. Postponing the implementation of structural reforms such as for the labour market, tax and pension systems means that last year’s slowdown in growth was inevitable, even though the figures were better than they had initially expected, Moody’s warned. The latest such delay arose from the ruling Justice and Development Party’s (AKP) post-coup focus on changing the government from a parliamentary to an executive presidency system, which the party expects will centralize decision-making, it said. “Additional postponements would likely limit a recovery to past rates of growth,” said Moody’s. The rating agency late on March 17 cut its outlook on Turkey’s rating to “negative” as risks to the country’s credit profile have “risen materially” in recent months. Moody’s noted that the “tense political environment” following the failed coup attempt on July 15, 2016, has “persisted for longer than expected” and has “undermined the country’s administrative capacity and damaged private sector confidence.”

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Moody’s rates Turkey at Ba1. It previously had a “stable” outlook on the sovereign. The ratings agency also affirmed its “junk” non-investment grade of Ba1 on Turkey’s debt, saying its economic and fiscal strength served as a buffer against the risks posed by its diminished institutional state. Referendum outcome unlikely to ease political uncertainty according to Moody’s… International credit rating agency Moody's claimed that the April 16 referendum outcome was unlikely to ease political uncertainty. "Given the slender margin of support for the changes, we expect that Turkish society will remain polarized over this issue, leaving the government preoccupied with both domestic politics and geopolitically driven security risks," it said. Turkey's "fiscal strength" remains a key credit anchor, Moody’s said. "Expansionary fiscal policy stance to persist, causing historically favourable debt metrics to weaken somewhat," the agency said in a statement "We expect that the Turkish government will be reluctant to withdraw its fiscal stimulus, which is propping up growth, leading to modestly rising debt-to-GDP ratios over the next two years. Fiscal strength nonetheless remains a key credit anchor," it added. The agency also said that business expects some structural reforms. "Business is calling on the government to enact long-delayed structural economic reforms, but the authorities' willingness to do so could be tempered by their desire to regain electoral support lost in the referendum before the 2019 presidential and parliamentary elections." Referendum may give space for economic reforms according to Fitch… Having already junked Turkey’s sovereign rating on account of its eroding constitutional checks and balances, Fitch said a narrow victory approving the move to an executive presidency on Sunday could prove good news for the slowing Turkish economy. Still, Fitch said the triumph for the ruling AK party could spur the government to get ahead with growth-boosting fiscal policies and undertake vital structural reforms. “Implementation of reforms that address structural deficiencies and reduce external vulnerabilities is a positive rating sensitivity” said Paul Gamble at Fitch. In the wake of the referendum triumph, Fitch said the government had gained some political breathing room to avoid early elections and “allow the economy to move back up the ruling AKP’s policy agenda”. “The AKP has a developed economic reform programme, but little has been implemented in recent years due to the fluid political backdrop, and structural weaknesses (including high net external debt and external financing requirements and poor composition of growth) have become more pronounced”, said Mr Gamble. The credit rating agency highlighted that at the time of the downgrade, Fitch assumed the constitutional amendments would be approved. The agency is scheduled to review Turkey's sovereign rating is due on 21 July 2017. Turkish government extended tax cuts on electronic goods, furniture until September… The Turkish government has extended tax cuts on home appliances and furniture for a further five-month period to stimulate sluggish consumer demand, Prime Minister Binali Yıldırım stated on April 10. Yıldırım, added that the cabinet would also continue to apply tax cuts for small-scale tradespeople and employers as well. The tax cuts in furniture and electronic goods came into effect in February and are expected to end by the conclusion of April. The government cut special consumption taxes on a number of electronic home appliances and extended value-added tax (VAT) cuts on property acquisitions ahead of a key

6

referendum on April 16 on whether to shift to an executive presidential system. Special consumption taxes on air conditioners, refrigerators, washing machines, dish washers, vacuum cleaners and some small home appliances were reduced from 6.7 percent to zero for the acquisitions, according to a cabinet decision published in the Official Gazette on February 3. The VAT on wood, plastic and office furniture was also decreased to 8 percent. Finance Minister Naci Ağbal said the tax cuts had created a TL 350 million cost to the budget, adding that the figure would likely increase to TL 800 million with the new extension. At the same time, Ağbal suggested the cuts would ultimately boost the economy. Ağbal said the ministry was also working on a plan to extend the tax restructuring scheme, which will likely cover payments that were obliged to be made by the end of March 2017. Political Developments: Victory for the presidential system in Turkey… Turkey’s Supreme Election Board (YSK) published the official results of the April 16 referendum on constitutional amendments in the Official Gazette on late April 27. Voters went to the polls on April 16 to decide whether to approve changes to the country’s constitution, which also includes a shift from the current parliamentary system to an executive presidency. The “yes” campaign won with 51.41 percent, while the “no” vote stood at 48.59 percent, the official results showed. A total of 48,936,604 votes were regarded valid, and the turnout was 85.43 percent, the Official Gazette said. The number of “yes” voters were 25,157,463 while the number of “no” voters were 23,779,141. Separately, the board also released a decision explaining the reason for rejecting petitions submitted by three political parties to annul the referendum. Ten out of 11 board members voted against the appeals after petitions over irregularities were filed by main opposition Republican People’s Party (CHP), Peoples’ Democratic Party (HDP) and the leftist Patriotic Party (VP). The board said in a statement that it had decided to accept unstamped ballot papers before the boxes were closed for the vote counting process, adding that the decision was objective, and in line with the principle of equality and impartiality. The YSK stressed that the mistakes of the ballot box officials who did not stamp the ballot papers in certain locations should not obstruct the people’s right to vote. After the election board rejected the opposition parties’ appeal, the CHP then appealed to the Council of State, urging the court to suspend the official referendum results until the end of the legal process. The court, however, also rejected the appeals saying no appeal against YSK decisions could be made at any court. The CHP said it would appeal the referendum results to the European Court of Human Rights (ECHR). The constitutional changes put to the referendum have been discussed since Recep Tayyip Erdoğan was voted in as president in August 2014, marking the first time the president was elected by a popular vote. An 18-article reform package was passed by parliament in January by 339 votes in favour - nine more than needed to take the proposals to a referendum. With the changes in the constitution, wide-ranging executive powers will be handed to the president and the post of prime minister will be abolished. The president will also be allowed to retain ties to a political party. Other changes will see the minimum age for parliamentary candidates reduced to 18 and the number of lawmakers in parliament rise to 600. Simultaneous parliamentary and presidential elections for a five-year term are scheduled for November 2019.

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A large portion of the 18-article constitutional amendment referendum package will be put into effect after the general and presidential elections will be held simultaneously on November 3, 2019. Yet three articles of the package can enter into force instantly. These articles concern membership of the President to a political party, the reorganization of the Supreme Council of Judges and Prosecutors (HSYK) as well as abolishing military justice system. Thus, President Recep Tayyip Erdoğan has become a Justice and Development Party (AKP) member after three years on May 2.

The Council of Europe assembly to reopen monitoring process against Turkey… The Parliamentary Assembly of the Council of Europe (PACE) has voted to reinstate monitoring procedures of Turkey in a vote in Strasbourg. The resolution authored by Ms Ingebjørg Godseken of Norway and Ms Marianne Mikko of Estonia was approved with a vote of 113 to 45 with 12 abstentions. The resolution acknowledged the challenges facing Turkey in the wake of last July’s coup attempt, the on-going civil war in Syria, and terrorist attacks from ISIS, the PKK and other groups. However it goes on to voice concern that “measures have gone far beyond what is necessary and proportionate”, and calls for Turkey to release imprisoned parliamentary politicians and journalists in pre-trial detention, lift the state of emergency as soon as possible, and rein in the purge of government employees. PACE will therefore “reopen the monitoring procedure in respect of Turkey until its concerns are addressed in a satisfactory manner”. The Turkish Ministry of Foreign Affairs responded to the vote by saying: “We strongly condemn this unjust decision of PACE taken with political motives in contravention to the established procedures.” “Such a decision leaves no choice to Turkey but to reconsider its relations with PACE.” Turkey has been a member of the Council of Europe since 1950. Since 2004 PACE and Turkey have been in ‘post-monitoring dialogue’ following a monitoring period that began after the 1980 coup. Russia-Turkey relations: steps to normalization… Turkish and Russian leaders agreed on May 3 that Turkey-Russia relations had been fully restored since November 2015, when Turkey shot down a Russian military jet over airspace violation. The announcement came during a joint news conference between President Recep Tayyip Erdogan and his Russian counterpart Vladimir Putin, who met in Russia's coastal town of Sochi to discuss bilateral relations as well as regional and international issues. Putin said that Russia's relations with Turkey had fully recovered and the trade volume had stopped falling. "Our relations have been tested in the recent past. I can say that Russia-Turkey normalization period is now complete. We are getting back to a normal cooperative partnership," the Russian president said. Erdogan said Turkey and Russia were "beyond normalization" and entering "a new phase," adding both countries were working hard to revive the relations. Turkish president said the relations between the two countries had gained a special status and the two could change the destiny of the whole region together. Turkey-Russia relations, which had remained damaged after the jet downing crisis, seemed largely resolved last June through a letter and subsequent telephone calls between the countries’ leaders. Syrian civil war was also high on the agenda of the two leaders who discussed the issue of establishing de-escalation zones in the war-stricken country. Putin said he was on the same page with Erdogan regarding this matter, adding that he also discussed the issue with U.S. President Donald Trump over the phone and that the U.S. administration appeared to back the idea. On the other hand, Erdogan said Moscow and Ankara agreed on all trade issues including food and textiles except tomatoes. After the

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MONTHLY INFLATION (%)

-4

-3

-2

-1

0

1

2

3

4

5

08 1 5 9

09 1

5 910 1 5 9

11 1 5 9

12 1 5 9

13 1 5 9

14 1 5 9

15 1 5 9

2016

1 5 92017

1

DPPI CPI

ANNUAL INFLATION RATES (%)

-5

0

5

10

15

20

08

1 4 71

009

01 4 71

01

0 0

1 4 71

011

01 4 7

10

12

01 4 7

10

13

01 4 7

10

14

01 4 7

10

15

01 4 7

10

16

01 4 7

10

17

01 4

PPI CPI

November 24, 2015 jet crisis, Moscow took several measures against Turkey, including ban on imports of Turkish agricultural products. Since last summer, Russia has relaxed the measures imposed on Turkey and lifted the ban on some products, particularly citrus fruits. Following the statements from Erdogan and Putin, Russian Deputy Prime Minister Arkady Dvorkovich said that Moscow and Ankara had resolved all trade issues except tomato imports from Turkey, and visa-free travel for Turks.

MACRO ECONOMIC DEVELOPMENTS

CPI rose by 1.31% in April: yearly inflation is 11.87%... The CPI inflation continued to increase in April. The CPI (consumer price index) rose by 1.31% on a monthly basis and the CPI yearly inflation went up to 11.87%. On the other hand, the DPPI (domestic producer price index) rose by 0.76% on a monthly basis and the DPPI yearly inflation rose to 16.37%. The high CPI inflation can be attributed to the surge in the clothing, food and transportation prices. Thus, the CPI inflation reached its highest level in 9 years.

In this light, the highest price increase within the CPI index was in the clothing and shoes sector with 9.13%. The increase can be related to the new season period. The price increase was 1.26% in the miscellaneous goods and services and 1.23% in the food and non-alcoholic beverages. The rise in the food prices has continued despite the spring months. The exports in various fruit and vegetables can be one of the reasons. The rise in the transportation prices was 0.84%. The contribution to inflation was 0.64 percentage points (pp) for the clothing sector, 0.26 pp for food and 0.13 pp for the transportation sector. On the other hand, there was a decline of 0.02% in the prices of the communication sector. In annual terms, the highest price increase was in the tobacco and alcoholic beverages group with 21.65%, followed by 17.94% rise in the transportation sector and by 15.63% increase in the food and non-alcoholic beverages sector. The core inflation indicators continued to increase on a monthly basis, but did not change much on a yearly basis. The favourite core inflation index C increased by 1.89% on a monthly basis, with a yearly rise of 9.42%. On the other hand, the second favourite B index

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SELECTED CPI INDICATORS*

1%

3%

5%

7%

9%

11%

13%

15%

08

4 71

009

1 4 71

01

0 1

4 71

011

1 4 71

012

1 4 71

013

1 4 71

01

4 1 4 71

015

1 4 71

016

1 4 71

01

7 1 4

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

C: Energy, food and non-alco. bever., alco. bever., tobacco and gold excluded

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

Special (core) CPI Aggregates

% change 2017

April

2017 April/

2016 April

A. CPI excluding

seasonal products 0,82 11,13

B. CPI excluding

unprocessed food,

energy,

alcoholic beverages

tobacco and gold 1,73 9,12

C. CPI excluding energy,

food and non-alcoholic

beverages, alcoholic

beverages, tobacco and

gold 1,89 9,42

D. CPI excluding

unprocessed food,

alcoholic beverages and

tobacco1,37 9,68

CPI Components

% change Weights 2017

April

2017

April/2016

April

TURKEY 100,00 1,31 11,87

Food and non-

alco. beverages 21,77 1,23 15,63

Alco. beverages

and tobacco 5,87 0,01 21,65

Clothing and

footwear 7,33 9,13 5,17

Housing, water,

electricity, gas

and other fuels 14,85 0,21 7,53

Household

equipment 7,72 0,94 5,58

Health 2,63 0,45 13,32

Transport 16,31 0,84 17,94

Communications 4,12 -0,02 4,15

Recreation and

culture 3,62 0,69 9,22

Education 2,69 0,69 9,64

Hotels, cafes and

rest. 8,05 0,96 9,27

Miscell. goods

and services 5,04 1,26 13,68

rose by 1.73% on a monthly basis, with an increase of 9.12% on a yearly basis. According to the goods and services indices, yearly goods inflation was 13.20% in March, while yearly service inflation was 8.87%.

The DPPI inflation which comprises the industrial producer prices rose by 0.76% in April and the yearly increase rose to 16.37%. Prices increased by 0.80% in the manufacturing sector. The prices rose by 0.62% in the water sector, while the increase was 1.04% for the electricity and gas sector prices. Meanwhile, there was a decline of 0.82% in the prices of the mining sector. The yearly rise in the manufacturing prices reached 18.27% in April.

As a result, inflation continued to increase in April. The continuing effects of the FX pass-through and the fluctuating food, clothing and energy prices are the main causes of this rise. The same effects can be also valid for May. However, the food inflation can slow down due to the seasonal factors. Meanwhile, the recent decrease in FX and oil prices can positively affect inflation. On the other hand, the possible rise in the domestic demand after the referendum may create an upward pressure on the prices. Thus, we expect that the inflation rate will stay around 12% in May as well. However, there can be a slight drop in the summer months. Our year-end CPI inflation forecast is 9.80%.

10

-25

-20

-15

-10

-5

0

5

10

15

20

25

20

07

1 4 71

02

00

8 1 4 71

02

00

9 1 4 71

02

01

0 1 4 71

02

01

1 1 4 71

02

01

2 1 4 71

02

01

3 1 4 71

02

01

4 1 4 7

10

20

15

1 4 71

02

01

6 1 4 7

10

20

17

1

Yearly Monthly

Monthly Industrial Production*

* Yealy change calendar adj.., monthly change cal. & seasonally adj.

Industrial production rose by 1% in February… Industrial production was weak in the second month of the year. The calendar-adjusted industrial production rose by only 1% in February compared to the same month of the previous year. The first two months average points to a 1.8% increase. On the other hand, production decreased by 1.7% according to the non-adjusted figure. Production also fell by 0.4%% compared to the month before according to the seasonally and calendar-adjusted index.

The strongest yearly increase among the main industry groups was in the energy production which rose by 7.4% according to the calendar-adjusted index. The production in the durable consumer goods rose by 5.8%. It was followed by an increase of 5.5% in the capital goods production. However, there was a drop of 0.9% in the non-durable goods production, while the decrease was 3.4% for the intermediary goods. There was a decline of %3.5 in the intermediary goods production. According to the sub-sectors, there was only 0.7% increase in the

manufacturing sector in February on annual terms. The production in the electricity and gas sector also registered a surge of 9.4%, while there was a decline of 13.6% in the mining and quarrying sector production compared to the same month of the previous year. Consequently, industrial production lost momentum in February. Although durable goods and capital goods production registered a strong rise, intermediate goods production contracted for the fourth consecutive month. However, according to various leading indicators and robust PMI figures for March, we can expect that the final month for the first quarter will be better than the previous ones. Foreign trade deficit was USD 12.5 billion in January-March period... The trade deficit decreased compared to the same month of the previous year in March 2017. The rise in the exports surpassed the increase in imports. Nevertheless, the gold surplus of the March 2016 turned to a deficit in March 2017. The foreign trade deficit in March was USD 4.5 billion with 10.3% decrease compared to the same month of the previous year. Exports rose by 13.6% to USD 14.5 billion while imports increased by 6.9% to USD 18.9 billion. However, the trade deficit in the first quarter of the year still increased compared to the same period of the year. There was a deficit in the net gold trade instead of a surplus last year. The foreign trade deficit in the January-March period was 12.5 billion with 3.3% increase compared to the same period of last year. Exports rose by 9.2% to USD 37.9 billion, while the increase was 7.7% for the imports which rose to 50.4 billion. Meanwhile, the twelve-month foreign trade deficit decreased to USD 56.5 billion from USD 57 billion a month ago.

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MONTHLY FOREIGN TRADE

(USD BILLION)

0

5

10

15

20

25

20

07

1 5 920

08

1 5 920

09

1 5 920

10

1 5 920

11

1 5 920

12

1 5 920

13

1 5 920

14

1 5 920

15

1 5 920

16

1 5 920

17

1

Exports Imports

50

75

100

125

150

175

200

225

250

275

200

7 1 4 71

02

00

8 1 4 71

02

00

9 1 4 71

02

01

0 1 4 71

02

01

1 1 4 71

02

01

2 1 4 71

02

01

3 1 4 71

02

01

4 1 4 71

02

01

5 1 4 71

02

01

6 1 4 71

02

01

7 1

Exports Imports

ANNUAL EXPORTS AND IMPORTS

(USD BILLION)*

* 12-months moving sums

The share of the exports and imports towards the EU countries decreased in January-March 2017 compared to the same period of 2016. However, while there was a surge in exports, imports slightly decelerated. The exports to the EU countries rose by 5.3% to USD 17.6 billion in this period. Imports from these countries went down by 0.4% to USD 18 billion. The share of the EU countries within the total exports was 46.5%, whereas the same share was 35.8% for imports. While the exports towards the Middle East increased, exports towards Africa have registered a fall in this period. The share of the exports towards Middle Eastern countries which was 19.8% in January-March 2016 rose to 24% in the same period of 2016. Meanwhile, exports towards these countries increased by 32.8%. Exports towards African countries went down by 2.6%, while their share also dropped to 7.5% from 8.5%. Meanwhile, the first destination of exports was again Germany with USD 3.6 billion, the UAE was the second country of destination and Iraq was the third. Exports to China, Russia and Bulgaria increased significantly in this period. On the other hand, the first country for imports was China with USD 5.3 billion, followed by Germany and Russia in the first quarter of the year. Motor vehicles other than railway rolling-stocks were the largest export items in January-March 2017 with USD 5.9 billion, increasing by 27.9% compared to same period of the previous year. Boilers-machinery and mechanical appliances, precious metals, iron-steel, knitted goods and articles and electrical machinery and equipment were the other large export items. Exports of precious metals fell by 16.4% in this period. Meanwhile, the largest import item was mineral oils and fuels with an import bill of USD 9 billion in January-March 2017, rising by 38.7% as compared to the same period of 2016. Boilers-machinery and mechanical appliances, electrical machinery-equipment, iron-steel and motor vehicles were among other major import items. There was 220% increase in the imports of precious

FOREIGN TRADE DEVELOPMENTS

(USD Million)

March 2016

(I)

March 2017 (II)

(%) Change

(II)/(I)

Jan.-March 2016 (III)

Jan.-March 2017 (IV)

% Change (IV)/(III)

Export 12,759 14,496 13.6 34,672 37,869 9.2

Import 17,766 18,988 6.9 46,796 50,394 7.7

Trade Balance -5,007 -4,492 -10.3 -12,125 -12,526 3.3

Export//Import (%)

71.8 76.3 - 74.1 75.1

12

metals. In this light, gold imports amounted to USD 2.7 billion, while exports reached USD 1.9 billion. As a result, there was a trade deficit of USD 818 million in the gold trade, instead of a surplus of USD 2 billion in the same period of last year. On the other hand, while imports of intermediate goods rose by 18.3%; the imports of consumption goods went down by 12.7% and the imports of capital goods have registered a decline of 17.5% in this period. After the positive results of March, the preliminary figures of the Customs and Trade Ministry indicated that the trade deficit started to rise again in April. The deficit increased by around 16% in this month. The current account deficit was USD 5.3 billion in January-February period... The February current account deficit was realized as 2.53 billion compared to a deficit of USD 1.96 billion in the same month of 2016. The rise in the foreign trade deficit and the decrease in the primary income revenues were the main factors causing the rise in the deficit. On the other hand, while there was a plunge in the direct investments, the portfolio investments registered a rise in February. The current account deficit in the January-February period also increased due to the rise in the foreign trade deficit and the decrease in the secondary income revenues. The current account deficit rose to USD 5.3 billion in this period from USD 4.3 billion compared to the same period of the previous year. The foreign trade deficit also rose to USD 5.6 billion from USD 4.6 billion a year before. The surplus from the balance of services was realized as USD 1.12 billion. On the other hand, the net tourism revenues fell to USD 1.1 billion from USD 1.2 billion. There was an outflow of USD 1.1 billion in the primary income balance. The inflow in the secondary income balance was USD 318 million. The 12-month cumulative current account deficit rose to USD 33.7 billion in February from USD 33.2 billion in January. On the financing side, the capital inflows which were USD 3.5 billion in January-February 2016 rose to USD 4.7 billion in the same period of 2017. In addition, the decline in direct investments continued. The net direct investments which were USD 1.1 billion in the same period of 2016 fell to USD 631 million. On the other hand, the real estate investments of non-residents fell to USD 510 million from USD 682 million. Portfolio investment, which had resulted in a net inflow of USD 70 million in January-February 2016, showed a net inflow of USD 2.5 billion in the same period of 2017. There was an inflow of USD 1.5 billion in the form of other investments compared to an inflow of USD 2.4 billion in the first two months of 2016.

In sum, while there was a deficit of USD 5.3 billion in the current account balance, the financial and capital account posted an inflow of USD 4.7 billion in January-February 2017. The net errors and omissions item registered a net outflow of USD 822 million in the same period with the outflow of USD 84 million registered in February. The Central Bank reserves fell by USD 1.5 billion in the first two months of the year despite the inflow of USD 576 million registered in February. As a result, the reserve assets which rose by USD 609 million in January-February 2016; decreased by USD 1.5 billion in the same period of 2017. As a result, the increase in the current account deficit continued in February. There was a rise in both the monthly and yearly deficits. The main factors for this rise were the surge in the trade deficit and the decrease in the service income. We expect the same factors to continue

13

throughout the year. However, the drop in the foreign trade deficit according to the leading indicators in March can decrease the current account deficit of this month. On the other hand, while the fall in the tourist numbers from Western countries continue, there was a significant recovery in the Russian tourists visiting Turkey this year, which can positively influence the tourism revenues in the following months.

Balance of Payments

*Inflows-, outflows +

The budget registered a deficit of TL 14.9 billion in the first quarter of 2017… The budget registered a deficit of TL 19.5 billion in March, compared to deficit of TL 6.6 billion in March 2016. There was a primary deficit of TL 12.4 billion compared to a surplus of TL 160 million in the same month of 2016. The total expenditures significantly increased in real terms in this month, whereas there was a decline in revenues. On the other hand, there was a decline in interest expenditures. The tax revenues continued to fall in this month due the tax cuts in several sectors to trigger consumption while there was also a decline in the non-tax revenues (the privatization income on March 2016 was stronger). Thus, the budget registered a deficit of TL 14.9 billion in the first quarter of 2017, compared to a surplus of TL 46 million in the same period of last year. There was a primary surplus of TL 3.9 billion compared to a surplus of TL 16.5 billion last year. On the expenditure side, there were increases in real prices in almost all items except social security premiums. There was a rise in interest expenditures as well. The total expenditures rose by 12.1% in real prices and they realized as TL 159.7 billion. While the non-interest expenditures rose by 13% in real terms to reach TL 140.8 billion, the interest expenditures surged by 5.6% to TL 18.8 billion. The current transfers rose by 21.7%. The social security institutions and health payments which amounted to TL 38.2 billion surged by 43.4% in real terms, whereas the funds allocated to local administrations amounted to TL 14.8 billion and the support to the agricultural sector reached TL 4.9 billion.

(USD Million) Jan.-Feb.

2016

Jan.-Feb. 2017

CURRENT ACCOUNT -4,166 -5,287

Foreign Trade Balance -4,632 -5,614

Balance of services 1,129 1,117

Travel 1,196 1,091

Transport 597 517

Primary Income -1,162 -1,108

Secondary Income 499 318 FINANCIAL and CAPITAL ACCOUNT* -3,512 -4,662

Direct Investments -1,063 -631 Portfolio Investments -70 -2,482

Other Investments -2,394 -1,533 NET ERRORS AND OMISSIONS 1,233 -822

RESERVE ASSETS 609 -1,479

Official Reserves 609 -1,479

Use of Fund Credit and Loans 0 0

14

Central Government Budget

On the revenues front, the growth in real prices continued in the first quarter of the year, however it significantly slowed down. The rate of increase decelerated in tax revenues, while there was a decline in non-tax revenues. The tax receipts from the VAT from imports, corporate taxes and special consumption taxes continued to increase, but the rise in the income tax was not strong. On the other hand, there was a decline in real prices in the domestic VAT revenues. The budget revenues rose by 1.6% in real terms in the same period and they were at the level of TL 144.7 billion. There was 14.1% decrease in non-tax revenues in real terms, while the tax revenues rose by 3.5%. As a result, the negative impact of the stimulus measures of the government which are mostly related to tax cuts on various items continued to negatively affect the fiscal situation. The same trend can continue in the next months and the budget deficit is expected to increase as it is also envisaged by the government officials. According the Minister of Finance Ağbal there was also a negative impact from the delayed social security premiums in this period which is a temporary phenomenon.

Central Administration Budget Jan.-March Jan.-March Real* Budget 2017

(TL Thousand) 2016 2017 % change Realization (%) Budget Forecast

Expenses 131.667.352 159.656.847 12,1 24,7 645.124.278

1-Excluding Interest 115.201.196 140.832.426 13,0 24,0 587.624.278

Personnel 38.672.200 41.903.757 0,1 25,8 162.638.925

Govern. Premiums to Social Security Ag. 6.555.241 6.991.674 -1,4 25,8 27.138.075

Good and Service Purchase 9.227.695 11.052.584 10,7 21,2 52.119.062

Current Transfers 54.233.615 71.426.412 21,7 28,7 249.265.903

Transfers to social security inst. 26.723.895 38.198.199 32,1 32,7 116.638.221

Capital Expenses 3.264.375 4.991.404 41,3 7,5 66.243.000

Capital Transfers 669.687 1.117.468 54,2 10,3 10.881.283

Liability 2.578.383 3.349.127 20,0 25,9 12.917.108

2-Interest 16.466.156 18.824.421 5,6 32,7 57.500.000

Revenues 131.713.669 144.734.727 1,6 24,2 598.273.690

1-General Budget Revenues 126.234.487 138.063.229 1,1 23,6 584.309.762

Taxes 108.543.286 121.616.313 3,5 23,8 511.085.194

Non-Tax Revenues 17.691.201 16.446.916 -14,1 22,5 73.225.000

Enterprise and Ownership Revenues 2.177.075 2.435.107 3,4 14,2 17.124.643

Grants and Aids and Special Reven. 1.239.141 1.062.773 -20,7 71,4 1.488.699

Interest, Shares and Fines 7.773.540 8.049.414 -4,3 21,4 37.545.356

Capital Revenues 6.452.636 4.753.736 -31,9 30,9 15.405.461

Receivable Collections 48.809 145.886 - 8,8 1.660.409

2-Special Budget İnstitutions 3.776.994 4.468.533 9,3 45,7 9.777.075

3-Regularity & Supervisory Institutions 1.702.188 2.202.965 19,6 52,6 4.186.853

Budget Balance 46.317 -14.922.120 -29873,5 31,9 -46.850.588

Balance Exclusive Interest 16.512.473 3.902.301 -78,2 36,6 10.649.412

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

15

USD/TL

1

1,5

2

2,5

3

3,5

4

02

.01

.2006

06

.03

.2006

02

.05

.2006

29

.06

.2006

25

.08

.2006

27

.10

.2006

25

.12

.2006

23

.02

.2007

24

.04

.2007

20

.06

.2007

16

.08

.2007

17

.10

.2007

14

.12

.2007

15

.02

.2008

14

.04

.2008

12

.06

.2008

08

.08

.2008

10

.10

.2008

16

.12

.2008

12

.02

.2009

10

.04

.2009

11

.06

.2009

07

.08

.2009

07

.10

.2009

10

.12

.2009

08

.02

.2010

06

.04

.2010

04

.06

.2010

02

.08

.2010

04

.10

.2010

09

.12

.2010

04

.02

.2011

04

.04

.2011

30

.05

.2011

26

.07

.2011

27

.09

.2011

29

.11

.2011

25

.01

.2012

21

.03

.2012

21

.05

.2012

17

.07

.2012

17

.09

.2012

19

.11

.2012

16

.01

.2013

14

.03

.2013

14

.05

.2013

10

.07

.2013

11

.09

.2013

15

.11

.2013

14

.01

.2014

12

.03

.2014

09

.05

.2014

08

.07

.2014

08

.09

.2014

11

.11

.2014

08

.01

.2015

06

.03

.2015

06

.05

.2015

03

.07

.2015

01

.09

.2015

04

.11

.2015

31

.12

.2015

29

.02

.2016

26

.04

.2016

23

.06

.2016

25

.08

.2016

31

.10

.2016

27

.12

.2016

22

.02

.2017

20

.04

.2017

EUR/TL

1,5

2

2,5

3

3,5

4

4,5

02.0

1.2

006

24.0

3.2

006

12.0

6.2

006

28.0

8.2

006

17.1

1.2

006

07.0

2.2

007

26.0

4.2

007

12.0

7.2

007

28.0

9.2

007

24.1

2.2

007

11.0

3.2

008

29.0

5.2

008

14.0

8.2

008

07.1

1.2

008

30.0

1.2

009

17.0

4.2

009

08.0

7.2

009

25.0

9.2

009

18.1

2.2

009

08.0

3.2

010

26.0

5.2

010

10.0

8.2

010

03.1

1.2

010

26.0

1.2

011

13.0

4.2

011

30.0

6.2

011

21.0

9.2

011

13.1

2.2

011

27.0

2.2

012

16.0

5.2

012

01.0

8.2

012

19.1

0.2

012

11.0

1.2

013

29.0

3.2

013

18.0

6.2

013

09.0

9.2

013

03.1

2.2

013

19.0

2.2

014

08.0

5.2

014

25.0

7.2

014

20.1

0.2

014

08.0

1.2

015

26.0

3.2

015

16.0

6.2

015

02.0

9.2

015

25.1

1.2

015

11.0

2.2

016

28.0

4.2

016

21.0

7.2

016

13.1

0.2

016

30.1

2.2

016

17.0

3.2

017

FINANCIAL MARKETS Markets in April… The Turkish markets were negatively affected by the rise of the inflation rate to the highest level in nine years in the beginning of April. However, the liquidity tightening by the Central Bank and the positive climate in the global markets limited this influence. The USD/TL parity rose to near 3.65 but soon it came back to 3.64. While the basket rate of the TL was 3.76, the euro/TL parity was at the level of 3.76 in the beginning of the month. The compound rate of the two-year bond was around 11.49%, while the ten-year bond rate was near 10.95%. Nevertheless, the decrease of the risk appetite in the global markets due to the rising political risks in South Africa changed the situation. The USD/TL parity rose to near 3.73 for the first time since March 15, with the increasing political uncertainties related to the April 16 referendum, geopolitical risks and the anxieties related to high inflation. The Central Bank increased its average cost of funding to 11.5% and also the amount of the US dollar swap auctions was augmented to USD 1.25 billion. The US missile attack to Syria escalated the worries in the Turkish market and the USD/TL rate rose to 3.75 with increasing volatility in the global markets, but rapidly returned to 3.73 after the statements from the USA that the operation will be limited and was targeting a Syrian military air base.

The markets were relatively calmer in the second week of April, before the referendum of April 16 related to changing the regime to a presidential one. The USD/TL parity fist went down to 3.71, while the benchmark two-year bond rates were around 11.40%. With the rising risk appetite in the global markets and polls indicating that the a “yes” vote is more probable in the referendum, the USD/TL parity went down to 3.66, while the benchmark bond rates fell to 11.21%. However, the parity soon rose to again above 3.67 with the geopolitical worries in the global markets related to North Korea and the uncertainties about the results of the referendum. The benchmark bond rate rose to above 11.40% as well, while the ten-year bond rates increased to near 11%. The referendum result was in favour of a regime change in Turkey. The switch to an executive presidency system of governance was approved by voters with a thin margin of 51.4 percent - about 1.3 million votes difference. This result and the elimination of the possibility of an early election were welcomed by the Turkish markets and the USD/TL rate fell to 3.63 at first. However, the markets fluctuated in the first day after the referendum and

16

Benchmark 11.07.2018 Bond Yields (Compound interest rates)

%

4

7

10

13

16

19

22

25

04

.01

.20

07

30

.03

.20

07

27

.06

.20

07

21

.09

.20

07

19

.12

.20

07

18

.03

.20

08

13

.06

.20

08

08

.09

.20

08

12

.12

.20

08

10

.03

.20

09

08

.06

.20

09

01

.09

.20

09

02

.12

.20

09

25

.02

.20

10

21

.05

.20

10

13

.08

.20

10

12

.11

.20

10

11

.02

.20

11

09

.05

.20

11

02

.08

.20

11

31

.10

.20

11

27

.01

.20

12

25

.04

.20

12

20

.07

.20

12

18

.10

.20

12

17

.01

.20

13

12

.04

.20

13

11

.07

.20

13

09

.10

.20

13

10

.01

.20

14

07

.04

.20

14

11

.07

.20

14

13

.10

.20

14

08

.01

.20

15

03

.04

.20

15

02

.07

.20

15

30

.09

.20

15

25

.12

.20

15

22

.03

.20

16

16

.06

.20

16

21

.09

.20

16

19

.12

.20

16

14

.03

.20

17

the parity rose again to 3.68. The trade volume was low in the global market as there was the Easter Holiday. The basket rate of the TL was around 3.78. There was also a decrease in the benchmark bond rates which fell down again to 11.20%. The USD/TL parity rose to 3.71 with the objections from the opposition parties related to the results of the referendum (the Supreme Electoral Board had decided to consider unstamped ballots as valid unless they were proved to be fraudulent), the extension of the “state of emergency” regime, the negative stance of the European Union about the referendum and the on-going death penalty discussions. However, with the fall of the US dollar in the global markets after the early election decision of the British government, the USD/TL parity went down to 3.65 again, while there were no major changes in the interest rates. While the political debate about the result of the April 16 referendum continued in Turkey, the markets waited for the first tour of the French presidential elections which will be realized on April 23.

The victory of Emmanuel Macron in the first tour presidential elections in France was welcomed by the markets and the Turkish Lira also appreciated after the result in Monday. The USD/TL parity went down to 3.58 from 3.65. The ten-year bond rates also plunged to 10.55%. However, the decision of the Parliamentary Assembly of the Council of Europe to reopen the monitoring process against Turkey slightly deteriorated the market but the negative effects were minimal. Nevertheless, the USD/TL parity went down to 3.56 after the rate hike

decision of the Central Bank which increased the late liquidity window (LLW) rate to 12.25% from 11.75%. While the benchmark two-year bond rates rose to 11.40%, the ten-year bond rates fell down to below 10.40%. The average funding cost of the Central Bank rose to 11.74% with the latest increase in the LLW. The inflation report of the Bank was disclosed on April 28. As the Governor of the Central Bank Çetinkaya reiterated the commitment of the Bank to tight monetary policy until a decrease in the inflation rate, the USD/TL parity fell to below 3.55.

On the other hand, the total domestic borrowings of the Treasury reached TL 3.9 billion, while it has TL 2.3 billion redemption in April.

FOREIGN EXCHANGE RATES (1)

30.12.16 (2)

31.03.17 (3)

28.04.17 (3)/(2)

%change (3)/(2) real % change

(3/(1) %

change

(3)/(1) % real change

USD/TL* 3,5255 3,6427 3,5568 -2,4 -3,6 0,9 -4,6 Euro/TL* 3,7166 3,8921 3,8814 -0,3 -1,6 4,4 -1,2 FX basket** 3,6211 3,7674 3,7191 -1,3 -2,6 2,7 -2,8 Euro/USD rate 1,0542 1,0685 1,0913 2,1 - 3,5 - * CB’s selling rate. ** 0.5 USD + 0.5 euro. *** The real change has been calculated using the CPI.

17

Consequently, while the USD/TL fell to the level of 3.5568 at the end of April from 3.6427 compared to the month before; the EUR/TL parity also went down to the level of 3.8814 from 3.8921 according to the daily FX rates announced by the Central Bank. On the other hand, the average compound interest rate of the benchmark bond increased to 11.40% at the end of April from 11.39% at the end of March.

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