Positive politics, but Turkey’s economic outlook is poor (Q2 2004)

The EU is now almost certain to set a date for the start of Turkish accession negotiations after its summit in December 2004, but the outlook for the Turkish lira and bond yields is still negative. With the budget deficit huge, we expect the deteriorating current account position to undermine confidence in the currency, boost inflation and hit bond prices. Of the new members of the EU, Hungary’s convergence prospects are the worst: with the Hungarian government having postponed attempts to join the Exchange Rate Mechanism (ERM) we expect short-term interest rates to be cut, and the forint to weaken. This, in turn, will boost inflation, and widen bond spreads. We do not expect Hungary to join the Economic and Monetary Union (EMU) before 2010.