Goldman Sachs FX Forecasts:

FX Forecasts: We maintain our forecast for $/TRY at 1.95, 1.90 and 1.75 in 3, 6 and 12 months. This implies €/TRY; at 2.59, 2.62 and 2.54 in 3, 6 and 12 months. The current $/TRY GSDEER is 2.28 and €/TRY GSDEER is 2.73.; Motivation for Our FX View: The large current account deficit continues to exert downward pressure on the TRY.; But the economy has also been rebalancing over recent months on the back of a broad-based economic slowdown and; the CBRT's somewhat tighter monetary policy. The CBRT has been actively intervening to support the currency. We; expect the currency to remain under depreciation pressure until this rebalancing process gets further underway,; stabilising later in 1H2012. However, recent easing in financial conditions on the back of growth concerns may delay; this process for longer.; Monetary Policy and FX Framework: The CBRT formally adopted inflation targeting in 2006. The current mediumterm; targets are 5.0% for 2012 and 2013.; Growth/Inflation Outlook: Growth reached 8.9% in 2010 and continued to expand at an annualised rate of over 7% in; 1Q2011, helped by still accommodative financial conditions. Since then, the economy has shown stronger signs of; external rebalancing through contracting domestic demand and a weaker TRY. We expect growth to continue to slow; over the coming quarters and forecast annual growth of 7.8% in 2011 and 0.8% in 2012. Inflation rose to 10.5% by; end-2011, overshooting the CBRT's 5.5% target substantially. We expect inflation to remain elevated over 1H2012,; before easing towards 6.7% by end-year, thanks to a larger output gap and (forecast) TRY appreciation.; Monetary Policy Forecast: The CBRT has been tightening domestic credit conditions while simultaneously driving; the TRY weaker, in an effort to help rebalance the economy. However, in response to intensifying external risks and; rapidly rising domestic inflation, the Bank switched to a broader tightening policy, raising short-term money market; rates by widening the corridor and more recently holding variable price repo auctions. However, over the last few days; the rates on central bank funding have fallen again. We expected O/N rates to fall to around 9.5% only by mid-2012.; This should be more growth-supportive, but it presents risks to the ongoing rebalancing effort and policy may have to; tighten again to achieve a falling CA deficit.; Fiscal Policy Outlook: Following a widening to 5.5% of GDP in 2009, the government introduced corrective; measures in late 2010 and the deficit fell to slightly below 4%. Thanks to 'one-off' items and robust domestic activity,; the deficit is likely to fall to around 2.4% in 2011, by our estimates. Over 2012 and 2013, fiscal policy should remain; relatively well anchored despite the extent of the domestic slowdown, and we see the deficit in a 3.6%-3.8% range over; the next two years.; Balance of Payments Situation: The current account deficit widened to 6.4% in 2010, peaked at 10.6% in 1Q2011; and is currently running close to 9.4% of GDP (3Q sa annualised). We expect further moderation in the remainder of; 2011 and 1H2012, but the pace of rebalancing looks to have slowed.; Things to Watch: External uncertainty continues to pose downside risks for Turkey.