CAPSTONE 20-2 Europe Field Study

Subject Page Turkey ...... 3 Norway...... 63 Germany ...... 115 Combatant Command ...... 169 National Security Strategy ...... 205

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Subject Page Ambassador David M. Satterfield ...... 5 US Relations with Turkey ...... 7 Economist Intelligence Unit Country Report ...... 11 BBC Country Profile Timeline ...... 51 Jane's Armed Forces ...... 57 3 This page intentionally blank

4 12/28/2019 U.S. Ambassador David M. Satterfield | U.S. Embassy & Consulates in Turkey

U.S. Embassy & Consulates in Turkey

U.S. Ambassador David M. Sattereld Ambassador Sattereld was conrmed as U.S. Ambassador to Turkey on June 27, 2019. Sattereld entered the Foreign Service in 1980 and holds the rank of Career Minister. He most recently served from June until July 2019 as Senior Advisor to the Secretary of State. He served as Acting Assistant Secretary for Near Eastern Affairs from September 2017 to June 2019, and from July 2009 until August 2017 as the Director General of the Multinational Force and Observers (MFO) in the Sinai Peninsula. At the Department of State, Sattereld served as Coordinator for Iraq and Senior Advisor to the Secretary of State, U.S. Deputy Chief of Mission in Iraq, Assistant Secretary of State (Acting) for Near Eastern Affairs, Principal Deputy Assistant Secretary of State for Near Eastern Affairs, Chief of Mission in Cairo, and U.S. Ambassador to Lebanon.

His Middle East experience spans almost forty years and also includes assignments in Syria, Tunisia, Saudi Arabia and two tours in Lebanon. Ambassador Sattereld served as Director of Arab and Arab-Israeli Affairs in the Department of State and as Director for Near Eastern Affairs on the National Security Council Staff from 1993 to 1996, where he worked primarily on the Arab-Israeli peace process. He is the recipient of the Secretary of State’s Distinguished Service Award, the Department of State Distinguished Honor Award, the Presidential Distinguished Executive Award and the Department of the Army Outstanding Civilian Service Award. His languages include Arabic and French.

Ambassador Sattereld attended the University of Maryland and Georgetown University.

This is the ocial website of the U.S. Embassy and Consulates in Turkey. External links to other Internet sites should not be construed as an endorsement of the views or privacy policies contained therein.

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6 1/17/2020 U.S. Relations With Turkey - United States Department of State

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MARCH 27, 2019

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More information about Turkey is available on the Turkey Page and from other Department of State publications and other sources listed at the end of this fact sheet.

U.S.-TURKEY RELATIONS

The U.S.-Turkey friendship dates to 1831, when the United States established diplomatic relations with the Ottoman Empire. After World War I and the founding of the Turkish Republic, the United States established diplomatic relations with Turkey in 1927. The Economic and Technical Cooperation agreement – signed July 12, 1947 between the United States and Turkey – advanced the relationship further. The agreement implemented the Truman Doctrine and its policy “to support free peoples who are resisting attempted subjugation by armed minorities or by outside pressures.” The United States condemned the July 15, 2016, coup attempt in Turkey and continues to emphasize the importance of Turkish government responses that build public trust in Turkey’s democratic institutions and the rule of law consistent with human rights’

7 https://www.state.gov/u-s-relations-with-turkey/ 1/17/2020 U.S. Relations With Turkey - United States Department of State commitments. Turkey is a key NATO Ally and critical regional partner, and the United States is committed to improving the relationship between our two countries. It is in our interest to keep Turkey anchored to the Euro-Atlantic community.

Security Cooperation

Turkey is an important U.S. security partner. Turkey has been a valued North Atlantic Treaty Organization (NATO) Ally since 1952. Turkey is a leader in the Alliance’s Resolute Support Mission in Afghanistan and serves as NATO’s vital eastern anchor, controlling (in accordance with international conventions) the straits of the Bosporus and the Dardanelles, which link the Black Sea with the Mediterranean.

Turkey is engaged in intensive efforts to defeat terrorist organizations both inside and outside its borders, including the Kurdistan Workers’ Party (PKK), the Revolutionary People’s Liberation Party/Front (DHKP-C), and ISIS. As a vital member of the Defeat ISIS Coalition, Turkey opened its military bases to the United States and Coalition partners in July 2015. Since that time, Incirlik Air Base has been critical in the effort to degrade and ultimately destroy ISIS in Syria and Iraq.

Turkey contributes to international security alongside U.S. forces in Afghanistan, the seas bordering Somalia, and in the Mediterranean. Turkey borders Greece, Bulgaria, Georgia, Armenia, Azerbaijan, Iran, Iraq, and Syria, and is a key partner for U.S. policy in the surrounding region.

Bilateral Economic Relations

Although overall U.S.-Turkey trade jumped from $10.8 billion in 2009 to $20.5 billion in 2018, it remains modest compared to its potential.

In 2017, Turkey was the United States’ 28th largest goods export market and its 34th largest supplier of goods imports. Turkey is the 10th largest purchaser of U.S. LNG exports worldwide and an emerging regional energy hub. The top categories of U.S. exports to Turkey include aircraft, mineral fuels, iron and steel, machinery, cotton, and agriculture. The top import categories from Turkey include machinery, vehicles, carpet and other textile coverings, iron and steel and their products, agriculture, and stone, plaster, cement. Reported U.S. direct investment in Turkey is led by manufacturing, wholesale trade, and finance and insurance.

8 https://www.state.gov/u-s-relations-with-turkey/ 1/17/2020 U.S. Relations With Turkey - United States Department of State Although not a member of the European Union (EU), Turkey has a customs union with the EU.

Turkey’s Membership in International Organizations

Turkey hosted the G20 in 2015. Turkey is a member of NATO, the UN, the Organization for Economic Cooperation and Development (OECD), the Council of Europe, the Organization for Security and Cooperation in Europe (OSCE), the World Trade Organization (WTO), the Black Sea Economic Cooperation (BSEC) Council, the Euro-Atlantic Partnership Council, the International Monetary Fund (IMF), the World Bank, and the Organization of Islamic Cooperation (OIC). Turkey also is an observer to the Organization of American States, a Dialogue Partner of the Shanghai Cooperation Organization and a sectoral dialogue partner of the Association of Southeastern Asian Nations (ASEAN). Turkey is a candidate for EU membership and is working towards accession. The United States is convinced that a Turkey that meets EU membership criteria would be good for the EU, and that Turkey’s efforts to meet those criteria is good for Turkey.

Bilateral Representation

Principal embassy officials are listed in the Department’s Key Officers List.

Turkey maintains an embassy in the United States at 2525 Massachusetts Avenue NW, Washington, DC 20008, tel. (202) 612-6700.

More information about Turkey is available from the Department of State and other sources, some of which are listed here:

CIA World Factbook Turkey Page U.S. Embassy History of U.S. Relations With Turkey U.S. Census Bureau Foreign Trade Statistics Export.gov International Offices Page Library of Congress Country Studies Travel Information

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10 ______

Country Report

Turkey

Generated on January 23rd 2020

Economist Intelligence Unit 20 Cabot Square London E14 4QW United Kingdom

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12 Turkey 1

Turkey

Summary 2 Briefing sheet

Outlook for 2020-24 4 Political stability 4 Election watch 5 International relations 6 Policy trends 6 Fiscal policy 7 Monetary policy 7 International assumptions 8 Economic growth 9 Inflation 9 Exchange rates 9 External sector 10 Forecast summary 10 Quarterly forecasts

Data and charts 11 Annual data and forecast 12 Quarterly data 12 Monthly data 14 Annual trends charts 15 Quarterly trends charts 16 Monthly trends charts 17 Comparative economic indicators

Summary 17 Basic data 19 Political structure

Recent analysis Politics 21 Forecast updates 24 Analysis Economy 28 Forecast updates 34 Analysis

Country Report January 2020 www.eiu.com © Economist Intelligence Unit Limited 2020

13 Turkey 2

Briefing sheet Editor: Adeline Van Houtte Forecast Closing Date: January 12, 2020 Political and economic outlook In June 2018 Recep Tayyip Erdogan was re-elected in a snap presidential election, and his conservative Justice and Development Party (AKP) secured a coalition majority with the right- wing Nationalist Action Party (MHP) in an early parliamentary election. Mr Erdogan will continue to clamp down on domestic political dissent and opposition. The government will continue to favour fast economic growth in the years leading up to the general election in 2023, but policymaking will be more orthodox than in 2017-18. In line with the government's policy approach reflected in its medium-term programme, The Economist Intelligence Unit expects the fiscal deficit to average 2.6% of GDP in the 2020-24 forecast period. This will prevent the public debt/GDP ratio from dropping. We expect the main policy interest rate to end 2020 at 10.5%. In 2021-24 we expect low real policy rates owing to sustained pressure on the Central Bank of Turkey to keep nominal rates below the realistic levels needed to reach its inflation target. In 2020-24 we expect average real GDP growth of 3.6% as the state attempts to meet its annual 5% target. With the government strongly prioritising GDP growth, there is a risk of a loss of investor confidence in 2020-24. Domestic political uncertainty, tensions with the US, an inadequate monetary policy stance, elevated inflation and a widening current-account deficit will be among the factors causing the Turkish lira to depreciate against the US dollar throughout 2020-24. Key indicators 2019a 2020b 2021b 2022b 2023b 2024b Real GDP growth (%) 0.1 3.8 3.6 3.7 3.7 3.4 Consumer price inflation (av; %) 15.2c 11.2 9.4 9.1 8.2 7.8 Government balance (% of GDP) -3.0 -3.2 -3.0 -3.0 -2.8 -2.0 Current-account balance (% of GDP) 0.2 -1.2 -2.6 -3.1 -3.5 -3.4 Money market rate (av; %) 20.7c 10.9 11.7 11.0 10.0 9.5 Unemployment rate (%) 13.7 12.3 11.7 10.8 9.9 8.4 Exchange rate TL:US$ (av) 5.68 5.91 6.13 6.42 6.59 6.78 a Economist Intelligence Unit estimates. b Economist Intelligence Unit forecasts. c Actual.

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14 Turkey 3

Key changes since December 9th We have revised our exchange-rate forecast in 2020-24 to better reflect the downward pressures on the currency stemming from the government's pro-growth stance. We forecast an average exchange rate of TL6.37:US$1 in 2020-24 (TL6.25:US$1 previously). The month ahead February 3rd—Inflation (January): In 2019 inflation averaged 15.2% as base effects, lower average oil prices, subdued consumer demand and spare capacity in the economy exerted downward pressure on prices. We expect inflation to continue decelerating in 2020 as average global oil prices decline modestly and excess capacity persists. February 19th—Central bank interest­rate decision: The bank aggressively cut rates in the second part of 2019. With the main policy rate now close to the current rate of inflation, the central bank has limited scope to cut rates. We expect the central bank rate cuts to be much smaller and less frequent in 2020. Major risks to our forecast Scenarios, Q4 2019 Probability Impact Intensity Very Attracting adequate capital inflows proves difficult Very high 25 high Investors further lose confidence in the independence of the Central Bank of Very Very high 25 Turkey, triggering another currency crisis high High-level public-sector corruption impedes government effectiveness High High 16 Islamist extremists revive their campaign of violence in Turkey High High 16 Very Deepening polarisation leads to increased political violence Moderate 15 high Note. Scenarios and scores are taken from our Risk Briefing product. Risk scenarios are potential developments that might substantially change the business operating environment over the coming two years. Risk intensity is a product of probability and impact, on a 25-point scale. Source: The Economist Intelligence Unit.

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15 Turkey 4 Outlook for 2020-24 Political stability Recep Tayyip Erdogan, the president, and his conservative Justice and Development Party (AKP) have dominated Turkey's political scene since coming to power in November 2002. During this period they have tightened their grip on authority, by replacing Turkey's parliamentary system of government with an executive presidential system that has concentrated control in the hands of Mr Erdogan and by clamping down on all forms of political opposition. The economy has become less stable in recent years as a result of domestic political tensions, fraught international relations and unorthodox economic policies. This has jeopardised the hard- won improvements in macroeconomic stability on which the AKP built much of its electoral success in the early years of its dominance. Nevertheless, The Economist Intelligence Unit expects the AKP and Mr Erdogan, who came close to being overthrown in an attempted coup by parts of the military in July 2016, to remain in power until 2023 (the next general election), and probably beyond. Mr Erdogan and the AKP suffered a clear blow to their credibility when an opposition candidate, Ekrem Imamoglu, increased his margin of victory over Binali Yildirim of the ruling coalition in the mayoral election rerun in Istanbul (Turkey's largest city) in June 2019. However, we expect Mr Erdogan to keep a tight grip on national institutions and the media in order to continue his dominance of Turkish politics. Security risk remains high, as Turkey appears vulnerable to terrorist attacks by the Kurdistan Workers' Party (PKK) and Islamic State (IS). Neither the government nor the PKK are interested in reviving peace negotiations that collapsed in mid-2015, increasing the risk that violence will return to 1990s levels. The fact that the ruling coalition is made up of the AKP and the Nationalist Action Party (MHP) will hinder attempts to resolve the Kurdish issue, as the MHP is pushing for hawkish policies aimed at constraining and delegitimising the pro-Kurdish Peoples' Democratic Party (HDP). Turkey's incursion in October 2019 into the north-east of Syria to remove the main Kurdish group from that region has increased the risk of PKK violence.

Election watch Mr Erdogan was re-elected as president in the first round of the June 2018 election, securing 52.6% of the vote on a turnout of 86.2%. In the parliamentary election the AKP lost its absolute majority—although it secured a coalition majority with the MHP—as the HDP managed to win more than the 10% threshold needed to enter parliament. The election process appeared to be mostly free, but largely unfair; opposition candidates received little or no media coverage and the government restrained freedom of speech and association. Local elections took place in March 2019. The AKP and the MHP retained a majority of the national vote. However, the ruling parties lost vital cities such as Ankara, the capital, and Istanbul. Given the public resources that major cities command, Mr Erdogan and the AKP put huge pressure on the Supreme Election Council (YSK) to annul the Istanbul election result. Although the YSK ordered an election rerun, the opposition candidate still won in June 2019.

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16 Turkey 5 International relations An increasingly multipolar world, national security threats, Turkey's suspicion of its traditional Western allies since the attempted coup in July 2016, growing Turkish nationalism and the government's ambition to establish the country as a regional power have all contributed to a shift in foreign policy approach under the AKP. This shift has led to Turkey adopting a more assertive stance with the US, the EU and several core EU member states, and establishing closer relations with countries with which it previously had rivalries or limited ties, and that are deemed a threat to the West—such as Russia and China. This has also left Turkey strategically isolated, calling into question its continued membership of NATO and its declared goal of joining the EU one day. Despite Mr Erdogan's strong personal relationship with the US president, Donald Trump, Turkey- US relations reached new lows in 2019 when Turkey bought the Russian S-400 missile-defence system, which is not interoperable with NATO standards. Turkey-US relations are likely to remain tense in 2020 and beyond. The main trigger for a further deterioration in 2020 could be the possible imposition of sanctions on Turkey by the US for its purchase of the S-400, its latest incursion into Syria because of its potentially negative impact on the US-led war against IS as well as the alleged violations of US sanctions against Iran by Halkbank, a Turkish state-owned bank. We expect that Turkey will activate the missile-defence system in April 2020, which is likely to result in US sanctions. However, sanctions will lean towards the less onerous side to avoid pushing Turkey fully into Russia's orbit and ensure a degree of collaboration on other issues. Relations with the EU are also unlikely to improve in 2020 and beyond, even if we think that it is unlikely that either side will move to end Turkey's moribund EU membership negotiations formally. The main areas of tension are likely to be over the EU-Turkey action plan to curb the flow of migrants through Turkey to the EU, and Turkey's insistence that EU countries accept the repatriation of IS fighters and sympathisers that originated from EU countries (who are currently being held in Turkey and Turkish-controlled areas in Syria). Oil and gas exploration by Turkey and the Republic of Cyprus in the eastern Mediterranean also has the potential to further damage relations, and possibly even spark a military confrontation. The EU has admonished Turkey for its "unauthorised" and "illegal" drilling activities in disputed waters in the Eastern Mediterranean as a violation of Cyprus's exclusive economic zone (EEZ). Turkey has long disputed Cyprus's claim to some areas of the EEZ, arguing that they lie inside its continental shelf. Turkey also argues that until Greek and Turkish Cypriots reach a settlement regarding the division of the island, Cyprus's gas exploration in Cypriot waters violates Turkish Cypriots' rights.

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17 Turkey 6 Policy trends The government's past focus on domestic power struggles, and foreign policy challenges, has blocked the economic reforms needed to improve the business and investment climate. Nonetheless, Turkey's economy has displayed resilience during previous bouts of political instability and global financial market volatility owing to its solid public finances, effectively capitalised banking sector, and dynamic and diversified private sector. We expect that the AKP government will continue to favour economic policies aimed at reviving fast, credit-fuelled economic growth in the years leading up to the parliamentary and presidential elections in 2023, but that policymaking will be more orthodox than in recent years. The economy is weak and—following its poor performance in local elections—the AKP will continue to feel pressure to support growth. The emergence of challengers to the AKP from a number of former party members will further drive this policy line. This view is confirmed by the 2019-22 medium- term economic programme that was announced in September 2019. The programme forecasts annual growth of 5% in 2020-22 and an average central government budget deficit of 2.8% of GDP. Attempting to reach these economic growth targets will entail an element of unpredictability and unorthodox economic policy. However, we believe that such unconventionality will not reach the levels observed in 2017-18, when Mr Erdogan was pushing Turkey from a parliamentary to a presidential republic. The risk of another loss of investor confidence will further limit the degree of unorthodoxy. Shortcomings such as cronyism and corruption, skills mismatches and tax evasion are unlikely to be effectively addressed in the forecast period. The removal of the governor of the Central Bank of Turkey, Murat Cetinkaya, in July 2019 has added to the unpredictability of Turkey's policies, damaging financial market sentiment.

Fiscal policy Under the AKP, the public finances have been one of the economy's most reassuring aspects. Low budget deficit/GDP and public debt/GDP ratios reflect the positive impact of past cautious fiscal policy. However, this credibility is now weakening. After substantial fiscal stimulus, we estimate that the budget deficit widened from 2% in 2018 to 3% of GDP in 2019. In line with the government's preference for fast growth reflected in its medium-term programme, we expect an average deficit of around 2-3% in 2020-24. Despite our real GDP growth forecasts for 2020-22 being lower than those of the government, our higher inflation forecasts make the government's deficit targets achievable. These deficits will prevent government debt from declining; we expect it to settle at around 30% of GDP at end-2024.

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18 Turkey 7 Monetary policy In September 2018 the Central Bank of Turkey's monetary policy committee (MPC) dramatically raised the main policy rate, to 24%, in a belated response to a slide in the value of the lira against major currencies. The weakness of the lira had led to a surge in inflation. Since then the lira has recovered and the annual rate of consumer price inflation has subsided. Meanwhile, major central banks have been loosening monetary policy. In these conditions, the MPC slashed the bank's main policy rate—the one­week repo lending rate—by a total of 1,275 basis points from July 2019 to January 2020. The aggressiveness of these rate reductions was also undoubtedly related to the controversial appointment by Mr Erdogan of Murat Uysal as central bank governor in July 2019. The government and the bank officially aim to reduce inflation permanently to 5% or less in the medium term. However, their main focus appears to be on accelerating the ongoing recovery in economic activity, including by stimulating credit growth. Moreover, Mr Erdogan denies that interest rates need to be maintained at a certain level in order to reduce inflation. However, with the main policy rate now barely above the current rate of inflation, the central bank has limited scope to cut rates. We expect central bank rate cuts to be much smaller and less frequent in 2020, and forecast a policy rate of 10.5% at end-2020. The rate cuts reflect the government's continued pro-growth stance, putting pressure on the central bank to keep nominal rates below what would credibly be required to reach its inflation target. Importantly, this rate forecast implies that the real policy rate will be close to zero in the second half of 2020 creating an elevated risk of more substantial lira weakness in 2020 than we currently forecast. Tightening by the Federal Reserve (the US central bank) in 2021 and still-high inflation in Turkey will cause the central bank to raise rates to about 11.5% in 2021. Thereafter, in 2022-24, we expect gradual cuts alongside moderating inflation. In 2020-24 the central bank will continue to overshoot its inflation target of 5%.

International assumptions 2019 2020 2021 2022 2023 2024 Economic growth (%) US GDP 2.3 1.7 1.8 2.0 1.8 2.2 OECD GDP 1.6 1.5 1.8 1.9 1.8 2.0 EU28 GDP 1.4 1.4 1.7 1.7 1.6 1.8 World GDP 2.3 2.4 2.8 2.9 2.8 2.9 World trade 1.5 2.3 3.6 3.7 3.7 3.8 Inflation indicators (% unless otherwise indicated) US CPI 1.8 1.6 1.9 2.1 1.8 1.8 OECD CPI 1.9 1.8 2.0 2.2 2.1 2.0 EU28 CPI 1.5 1.5 1.8 1.9 1.9 1.9 Manufactures (measured in US$) -0.1 1.9 4.0 4.1 3.5 3.1 Oil (Brent; US$/b) 64.0 63.0 67.0 71.0 73.8 71.0 Non-oil commodities (measured in US$) -6.6 0.8 3.9 1.8 0.9 2.5 Financial variables US$ 3-month commercial paper rate (av; %) 2.2 1.5 1.5 1.8 2.2 2.3 € 3­month interbank rate (av; %) -0.4 -0.4 -0.4 -0.4 -0.2 0.0 Exchange rate TL:US$ (av) 5.68 5.91 6.13 6.42 6.59 6.78 Exchange rate US$:€ (av) 1.12 1.13 1.16 1.21 1.24 1.24

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19 Turkey 8 Economic growth Internal and external imbalances, alongside heightened policy unpredictability, foreign investors' concerns regarding the central bank's independence, reliance on short-term capital inflows, tighter global liquidity and a diplomatic spat with the US, contributed to the lira losing about 40% of its value against the US dollar in January-August 2018. This caused consumer price inflation to surge, increasing input costs for corporations and raising the debt-servicing costs of large foreign-currency-denominated liabilities. Higher domestic interest rates and rising risk premiums further dented the economic outlook. The crisis pushed the Turkish economy into recession in the second half of 2018. In 2019 we estimate that real GDP grew by 0.1%, compared with 3% in 2018. The low annual growth rate is the result of base effects arising from the sharp economic contraction in the second half of 2018. Quarter-on-quarter growth was positive in January-September 2019, and we estimate that there was further expansion in the final quarter. On the expenditure side, economic growth has been supported by household spending, government consumption and exports (boosted by a particularly strong tourism season). Domestic spending has been supported by lower consumer price inflation and interest rates. An expansionary economic policy stance (including a 26% increase in the minimum wage in January) has also supported growth. On the downside, investment will have contracted significantly. In 2020 we expect real GDP to grow by 3.8%. We expect private consumption to expand by a robust 5.1% owing to rising employment and wages, alongside lower inflation and interest rates. Government consumption will continue to support growth, albeit at a more limited level. As the overall economic picture improves and financing costs drop, we expect investment to recover gradually. Built­up excess capacity—particularly in the construction space—will limit the rate of investment growth, however. We forecast that export growth will decelerate slightly in 2020 following the strong performance of 2018-19. In 2021-24 we expect annual average growth of 3.6% as the government attempts to meet its annual growth target of 5%. This growth rate will be above the potential real GDP growth rate of about 3%, implying that the currently negative output gap will have been closed by 2023 and will turn positive by 2024. Population and employment growth, rising real wages, credit growth, government spending, continued capital investment, tourist inflows and increased goods exports will all drive growth. With the government consistently pushing economic growth above potential, there is a risk of a significant loss of investor confidence at some point in 2020-24. Economic growth % 2019a 2020b 2021b 2022b 2023b 2024b GDP 0.1 3.8 3.6 3.7 3.7 3.4 Private consumption 0.7 5.1 4.7 4.3 3.7 3.7 Government consumption 4.5 3.5 4.0 4.0 5.0 2.5 Gross fixed investment -13.8 1.2 7.0 4.0 3.8 3.8 Exports of goods & services 8.0 5.6 3.3 3.9 3.6 3.6 Imports of goods & services -5.5 10.7 10.5 6.2 4.9 4.6 Domestic demand -2.9 4.8 5.3 4.3 4.0 3.6 Agriculture 2.0 3.0 2.5 2.5 2.5 2.5 Industry -2.4 5.3 4.5 4.5 4.5 4.5 Services 1.2 3.2 3.3 3.5 3.4 2.9 a Economist Intelligence Unit estimates. b Economist Intelligence Unit forecasts.

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20 Turkey 9 Inflation In 2018 the currency crisis and rising global commodity prices drove inflation to 16.3% (from 11.1% in 2017). In 2019 annual consumer price inflation averaged 15.2% as base effects, lower average oil prices, subdued consumer demand and the emergence of spare capacity in the economy exerted downward pressure on prices. We expect inflation to decelerate to an average of 11.2% in 2020 as average global oil prices decline modestly and excess capacity persists. In 2021-24 we expect inflation to average about 8.6%—above the central bank's medium­term target of 5% and reflective of the government's preference for quicker growth.

Exchange rates In 2019 we estimate that the lira depreciated by 15% on average against the dollar. This reflects a number of factors, such as political uncertainty and polarising campaign rhetoric surrounding the March local elections; declining central bank foreign-exchange reserves; tensions with the US regarding the S-400 missile-defence system, the controversial removal in August of several notable figures from the Central Bank of Turkey; US-China trade tensions; and Turkey's incursion into north-eastern Syria. In 2020 we expect volatility to continue, but we forecast a more moderate depreciation, of 3.9%. An accommodative monetary policy stance in advanced economies and a historically narrow current-account deficit will partly offset the downward effect on the lira's value that stems from tensions with the US. In 2021-24 still-high inflation, wider current-account deficits and an inadequate monetary policy stance will result in gradual depreciation of the lira in nominal terms, to about TL6.8:US$1 by end-2024.

External sector Turkey usually runs substantial current-account deficits, offset by net inflows of capital from abroad. Since the sharp depreciation of the lira in mid-2018, however, capital inflows have been weak. Conversely, the current-account balance has improved dramatically. The trade deficit, which constitutes the most major component of the current account, shrank in line with the weak lira and the economic slowdown, while the surplus on the services balance (the second most important component) increased in 2019, reflecting a strong tourism season. As a result, we estimate that the current account posted a marginal surplus in 2019. From 2020 we expect the deficit to widen gradually, to a still-moderate 2.8% of GDP per year on average in 2020-24, as economic growth resumes. The narrower deficits compared with historical levels reflect excess capacity until 2023, as well as significant gains in competitiveness from the 2018 currency crisis.

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21 Turkey 10 Forecast summary Forecast summary (% unless otherwise indicated) 2019a 2020b 2021b 2022b 2023b 2024b Real GDP growth 0.1 3.8 3.6 3.7 3.7 3.4 Industrial production growth -0.5 4.9 4.6 5.1 4.4 4.1 Gross fixed investment growth -13.8 1.2 7.0 4.0 3.8 3.8 Unemployment rate (av) 13.7 12.3 11.7 10.8 9.9 8.4 Consumer price inflation (av) 15.2c 11.2 9.4 9.1 8.2 7.8 Consumer price inflation (end-period) 11.8c 10.5 9.2 8.7 8.0 7.6 Short-term interbank rate 20.7c 10.9 11.7 11.0 10.0 9.5 Government balance (% of GDP) -3.0 -3.2 -3.0 -3.0 -2.8 -2.0 Exports of goods fob (US$ bn) 182.8 195.3 214.8 234.5 254.5 273.1 Imports of goods fob (US$ bn) 200.8 225.4 256.9 281.1 307.9 329.1 Current-account balance (US$ bn) 1.4 -9.5 -23.3 -29.4 -35.7 -37.2 Current-account balance (% of GDP) 0.2 -1.2 -2.6 -3.1 -3.5 -3.4 External debt (end-period; US$ bn) 451.9 480.3 515.0 548.4 579.8 603.7 Exchange rate TL:US$ (av) 5.679 5.912 6.131 6.423 6.592 6.776 Exchange rate TL:US$ (end-period) 5.786 6.227 6.421 6.460 6.708 6.827 Exchange rate TL:¥100 (av) 5.209 5.531 5.851 6.354 6.752 7.101 Exchange rate TL:€ (av) 6.358 6.651 7.096 7.739 8.157 8.402 a Economist Intelligence Unit estimates. b Economist Intelligence Unit forecasts. c Actual.

Quarterly forecasts Quarterly forecasts 2019 2020 2021 1 Qtr 2 Qtr 3 Qtr 4 Qtr 1 Qtr 2 Qtr 3 Qtr 4 Qtr 1 Qtr 2 Qtr 3 Qtr 4 Qtr GDP % change, quarter on quarter 0.7 0.8 1.7 0.3 0.7 1.2 1.2 1.2 0.8 0.5 0.8 0.9 % change, year on year -2.4 -1.7 1.0 3.5 3.5 4.0 3.4 4.4 4.5 3.7 3.3 2.9 Private consumption % change, quarter on quarter 0.8 2.5 2.6 1.8 0.4 0.9 0.9 0.9 1.4 1.0 1.4 1.4 % change, year on year -4.9 -1.2 1.4 7.9 7.5 5.8 4.1 3.2 4.2 4.4 4.8 5.3 Government consumption % change, quarter on quarter 1.0 0.6 1.6 -1.4 1.1 1.6 1.6 1.6 0.7 0.4 0.7 0.8 % change, year on year 6.1 3.4 6.8 1.8 1.9 3.0 3.0 6.1 5.7 4.4 3.4 2.6 Gross fixed investment % change, quarter on quarter 3.5 -13.3 4.5 -0.6 1.0 1.5 1.5 1.5 2.0 1.6 1.9 2.0 % change, year on year -12.1 -22.5 -12.7 -6.9 -9.1 6.4 3.4 5.5 6.5 6.6 7.1 7.7 Exports of goods & services % change, quarter on quarter -3.3 3.8 5.1 4.3 -0.7 -0.2 -0.2 -0.1 1.5 1.1 1.4 1.5 % change, year on year 9.0 8.4 4.8 10.1 13.0 8.6 3.2 -1.2 1.0 2.3 4.0 5.7 Imports of goods & services % change, quarter on quarter -12.9 9.0 15.5 13.1 5.0 -26.0 11.8 17.1 7.0 4.6 -22.6 12.9 % change, year on year -29.5 -17.1 7.9 24.0 49.4 1.4 -1.8 1.7 3.7 46.6 1.5 -2.2 Domestic demand % change, quarter on quarter -1.1 1.5 3.6 2.4 -2.5 2.7 2.6 0.2 -0.4 2.6 2.8 0.5 % change, year on year -11.1 -7.4 1.4 6.5 5.0 6.2 5.2 2.9 5.2 5.0 5.2 5.6 Consumer prices % change, quarter on quarter 1.0 3.3 3.1 2.5 2.5 2.7 2.7 2.9 2.0 1.9 1.9 2.1 % change, year on year 20.0 18.0 13.5 10.2 11.9 11.1 10.8 11.2 10.7 9.8 9.0 8.2 Producer prices % change, quarter on quarter -0.6 6.2 -1.5 0.2 2.6 2.7 2.6 2.9 3.0 3.0 3.3 3.4 % change, year on year 30.8 28.0 12.0 4.3 7.6 4.0 8.3 11.2 11.6 12.0 12.8 13.4 Exchange rate TL:US$ Average 5.36 5.88 5.67 5.81 5.76 5.88 5.87 6.13 6.32 5.94 5.87 6.39 End-period 5.63 5.76 5.66 5.79 5.82 5.88 6.00 6.23 6.13 5.90 6.13 6.42 Interest rate (%; av) Money market rate 24.4 26.2 18.5 13.5 9.8 10.6 11.3 12.0 11.6 12.2 11.5 11.5

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22 Turkey 11 Data and charts Annual data and forecast

2015a 2016a 2017a 2018a 2019b 2020c 2021c GDP Nominal GDP (US$ bn) 857.6 861.9 849.7 769.2 760.8 820.0 884.0 Nominal GDP (TL bn) 2,332.6 2,603.2 3,099.7 3,714.1 4,320.7 4,847.3 5,419.6 Real GDP growth (%) 6.0 3.3 7.4 3.0 0.1 3.8 3.6 Expenditure on GDP (% real change) Private consumption 5.5 3.7 6.2 0.3 0.7 5.1 4.7 Government consumption 3.4 9.7 5.2 6.6 4.5 3.5 4.0 Gross fixed investment 9.0 2.4 8.1 -0.1 -13.8 1.2 7.0 Exports of goods & services 4.2 -1.8 11.9 7.6 8.0 5.6 3.3 Imports of goods & services 1.8 3.8 10.2 -7.4 -5.5 10.7 10.5 Origin of GDP (% real change) Agriculture 9.4 -2.6 4.9 1.9 2.0 3.0 2.5 Industry 5.0 4.6 9.2 0.4 -2.4 5.3 4.5 Services 5.5 3.1 7.6 4.7 1.2 3.2 3.3 Population and income Population (m) 78.5 79.8 81.1 82.3 83.4 84.3 85.0 GDP per head (US$ at PPP) 25,561 26,094 28,089 29,210 29,563 30,901 32,359 Recorded unemployment (av; %) 10.3 10.9 10.9 10.9 13.7 12.3 11.7 Fiscal indicators (% of GDP) Central government revenue 20.7 21.3 20.3 20.4 21.1 21.2 21.2 Central government expenditure 21.7 22.4 21.9 22.4 24.1 24.4 24.3 Central government balance -1.0 -1.1 -1.5 -2.0 -3.0 -3.2 -3.0 Gross public debt 29.1 29.2 28.3 28.7 30.2 30.4 30.6 Prices and financial indicators Exchange rate TL:US$ (end-period) 2.910 3.522 3.775 5.266 5.786 6.227 6.421 Exchange rate TL:€ (end­period) 3.168 3.713 4.528 6.029 6.451 7.068 7.609 Consumer prices (end-period; %) 8.8 8.4 11.8 20.2 11.8a 10.5 9.2 Stock of money M1 (% change) 20.7 22.8 17.7 13.1 33.3 16.2 14.8 Lending interest rate (av; %) 13.7 14.7 15.8 23.7 20.5a 13.8 13.3 Current account (US$ m) Trade balance -48,128 -40,892 -58,955 -41,916 -17,990 -30,120 -42,140 Goods: exports fob 151,970 150,161 166,159 174,599 182,795 195,310 214,764 Goods: imports fob -200,098 -191,053 -225,114 -216,515 -200,785 -225,430 -256,904 Services balance 24,228 15,263 19,938 25,831 30,945 33,760 33,960 Primary income balance -9,687 -9,183 -11,044 -11,927 -12,382 -13,968 -15,926 Secondary income balance 1,442 1,673 2,714 854 784 796 805 Current-account balance -32,145 -33,139 -47,347 -27,158 1,357 -9,533 -23,301 External debt (US$ m) Debt stock 399,949 409,421 456,174 445,139 451,918 480,258 514,979 Debt service paid 55,834 76,095 86,541 84,162 71,466 78,257 82,895 Principal repayments 41,977 61,603 69,142 67,875 48,622 55,403 59,724 Interest 13,857 14,492 17,399 16,287 22,844 22,854 23,171 International reserves (US$ m) Total international reserves 110,527 106,106 107,657 92,997 107,611 106,756 112,850 a Actual. b Economist Intelligence Unit estimates. c Economist Intelligence Unit forecasts. Sources: IMF, International Financial Statistics; Turkish Statistical Institute; World Bank.

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23 Turkey 12 Quarterly data 2018 2019 1 Qtr 2 Qtr 3 Qtr 4 Qtr 1 Qtr 2 Qtr 3 Qtr 4 Qtr General government finance (TL m) Revenue 167,436186,164193,217211,016218,283184,701250,824 n/a Expenditure 187,859211,832203,853226,906254,443227,124258,059 n/a Balance -20,423 -25,668 -10,635 -15,889 -36,160 -42,423 -7,235 n/a Output Real GDP at constant 2009 prices (TL m)a440,302440,538436,291426,669429,698433,034440,576441,812 Real GDP at constant 2009 prices (% 7.4 5.9 1.8 -2.5 -2.4 -1.7 1.0 3.5 change, year on year) Industrial production index (2010=100)a 117.0 115.6 115.0 109.7 111.6 112.4 114.4 n/a Industrial production index (% change, 9.0 4.3 0.8 -7.0 -4.6 -2.8 -0.6 n/a year on year) Manufacturing production index 117.1 115.6 114.8 109.1 33.0 33.0 33.0 33.0 (2010=100)a Mining production index (2010=100) 101 115 120 119 97 112 125 n/a Employment, wages and prices Employment ('000) 28,166 29,138 29,318 28,314 27,355 28,269 28,529 n/a Employment (% change, year on year) 4.5 2.3 1.7 -0.7 n/a n/a n/a n/a Unemployment rate (%) 10.6 9.7 11.1 12.3 14.7 12.8 14.0 n/a Hourly earnings, manufacturing 107 103 102 92 111 108 107 n/a (2010=100)b Consumer prices (2003=100) 332.8 349.5 374.6 395.4 399.2 412.5 425.2 435.9 Consumer prices (% change, year on 10.4 12.9 19.4 22.2 20.0 18.0 13.5 10.2 year) Producer prices (2003=100) 327.8 355.8 401.0 431.2 428.8 455.6 449.0 449.9 Producer prices (% change, year on 13.6 20.3 34.3 38.8 30.8 28.0 12.0 4.3 year) Financial indicators Exchange rate TL:US$ (av) 3.812 4.361 5.630 5.511 5.364 5.877 5.667 5.807 Exchange rate TL:US$ (end-period) 3.952 4.613 5.996 5.266 5.634 5.760 5.664 5.786 Deposit rate (av; %) 13.6 14.7 19.8 24.4 21.3 22.4 19.0 n/a Interbank money market rate (av; %) 14.2 16.6 22.4 26.2 24.4 26.2 18.5 13.5 M1 (end-period; TL bn) 451 515 559 510 576 610 652 n/a M1 (% change, year on year) 12.3 21.9 28.6 13.1 27.7 18.6 16.7 n/a M2 (end-period; TL bn) 1,678 1,808 2,021 1,939 2,090 2,160 2,259 n/a M2 (% change, year on year) 15.8 19.2 29.3 19.1 24.6 19.5 11.8 n/a ISE National-100 index (end-period; Jan 114,930 96,520 99,957 91,270 n/a n/a n/a n/a 1986=1) Stockmarket index (% change, year on 19.1 -3.9 -2.9 -20.9 n/a n/a n/a n/a year) Sectoral trends Car production (‘000) 285 272 212 257 n/a n/a n/a n/a Foreign trade (US$ m) Exports fob 41,135 41,028 40,779 44,979 42,214 41,470 42,052 45,844 Imports cif -61,894 -61,073 -51,188 -48,892 -49,026 -49,535 -49,917 -54,226 Trade balance -20,759 -20,045 -10,409 -3,914 -6,812 -8,066 -7,865 -8,382 Foreign payments (US$ m) Merchandise trade balance fob-fob -17,242 -16,512 -7,434 -728 -3,035 -5,075 -5,004 n/a Services & primary income balancec 786 1,755 8,954 2,411 n/a n/a n/a n/a Net transfer payments 212 -14 196 460 236 -1 402 n/a Current-account balance -16,244 -14,771 1,716 2,143 -1,744 -1,137 6,090 n/a Reserves excl gold (end-period) 84,700 75,566 66,976 72,867 75,404 73,542 75,224 n/a a Seasonally adjusted. b Gross earnings per production worker. c Including other goods. Sources: Central Bank of Turkey; Turkish Statistical Institute; OECD, Main Economic Indicators; IMF, International Financial Statistics; Bloomberg.

Monthly data Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Exchange rate TL:US$ (av)

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24 Turkey 13 2017 3.742 3.673 3.671 3.654 3.573 3.523 3.561 3.515 3.465 3.668 3.881 3.851 2018 3.771 3.780 3.884 4.054 4.403 4.627 4.753 5.797 6.340 5.847 5.383 5.302 2019 5.369 5.264 5.460 5.754 6.051 5.827 5.671 5.619 5.712 5.784 5.735 n/a Exchange rate TL:€ (av) 2017 3.972 3.909 3.922 3.918 3.950 3.956 4.099 4.150 4.128 4.313 4.556 4.558 2018 4.601 4.667 4.791 4.976 5.201 5.403 5.554 6.695 7.391 6.715 6.119 6.036 2019 6.129 5.976 6.171 6.466 6.768 6.580 6.362 6.252 6.285 6.393 6.338 n/a M1 (end-period; % change, year on year) 2017 22.2 21.3 26.3 31.2 28.4 22.8 21.5 26.2 25.0 24.3 21.7 17.7 2018 13.9 15.8 12.3 9.0 18.4 21.9 23.0 36.3 28.6 19.6 13.1 13.1 2019 17.6 20.0 27.7 24.7 24.5 18.6 16.9 8.5 16.7 28.2 38.1 n/a M2 (end-period; % change, year on year) 2017 19.1 16.7 18.7 20.6 19.3 20.2 18.7 20.3 20.1 21.8 19.0 15.7 2018 13.4 16.0 15.8 16.0 19.8 19.2 22.9 35.9 29.3 21.5 16.7 19.1 2019 20.6 21.5 24.6 25.6 21.2 19.5 15.1 7.4 11.8 18.3 23.4 n/a Industrial production index (% change, year on year; seasonally adjusted) 2017 3.5 3.6 5.8 8.5 5.1 7.0 14.1 9.4 13.7 9.7 10.7 14.4 2018 11.0 8.8 7.2 5.1 5.2 2.6 4.7 1.1 -3.2 -5.4 -6.0 -9.7 2019 -7.0 -4.7 -2.2 -3.8 -1.1 -3.4 -1.3 -3.4 3.1 3.9 n/a n/a Unemployment rate (%) 2017 13.0 12.6 11.7 10.5 10.2 10.2 10.7 10.6 10.6 10.3 10.3 10.4 2018 10.8 10.6 10.1 9.6 9.7 10.2 10.8 11.1 11.4 11.6 12.3 13.5 2019 14.7 14.7 14.1 13.0 12.8 13.0 13.9 14.0 13.8 13.4 n/a n/a Deposit rate (av; %) 2017 10.6 10.9 11.3 11.8 12.6 13.1 13.2 13.0 13.0 13.1 13.2 13.6 2018 13.7 13.6 13.6 13.8 14.1 16.2 17.6 18.5 23.2 25.4 24.3 23.6 2019 22.3 21.0 20.5 21.3 22.8 23.3 22.0 18.8 16.2 14.0 12.5 n/a Money market rate (av; %) 2017 10.7 11.5 12.1 12.5 12.8 13.0 13.0 13.1 13.1 13.2 13.8 14.7 2018 14.6 13.9 14.0 14.5 16.4 18.9 19.8 21.8 25.4 28.4 25.5 24.7 2019 24.6 24.0 24.5 26.2 26.7 25.8 21.9 17.6 16.1 15.3 13.5 11.8 Borsa Istanbul 100 stockmarket index (end-period; Jan 1986=1.00) 2017 86,296 87,478 88,947 94,655 97,542 100,440 107,531 110,010 102,908 110,143 103,984 115,333 2018 119,529 118,951 114,930 104,283 100,652 96,520 96,952 92,723 99,957 90,201 95,416 91,270 2019 104,074 104,530 93,784 95,416 90,590 96,485 102,082 96,718 105,033 98,469 106,904 114,425 Consumer prices (av; % change, year on year) 2017 9.3 10.2 11.4 12.1 12.0 10.9 9.8 10.6 11.0 11.7 12.8 11.8 2018 10.4 10.3 10.4 11.0 12.2 15.6 15.8 17.9 24.3 25.0 21.5 20.2 2019 20.4 19.7 19.8 19.7 18.5 16.0 16.7 15.0 9.2 8.5 10.5 11.8 Producer prices (av; % change, year on year) 2017 13.9 15.5 16.4 16.7 15.3 15.4 15.2 16.2 15.9 17.0 17.0 15.4 2018 12.3 13.8 14.5 16.6 20.3 24.0 25.0 32.0 45.8 44.7 38.2 33.6 2019 33.0 29.6 29.8 30.2 29.0 25.1 21.7 13.4 2.3 1.6 4.1 7.4 Total exports fob (US$ m) 2017 11,248 12,090 14,471 12,860 13,582 13,125 12,612 13,248 11,810 13,913 14,188 13,846 2018 12,434 13,148 15,553 13,847 14,257 12,924 14,049 12,332 14,398 15,677 15,492 13,810 2019 13,180 13,572 15,462 14,463 15,941 11,066 15,131 12,504 14,417 15,648 15,503 14,693 Total imports cif (US$ m) 2017 15,592 15,826 19,018 17,788 20,923 19,174 21,491 19,162 19,978 21,217 20,547 23,085 2018 21,522 18,937 21,435 20,557 22,067 18,449 20,058 14,804 16,327 16,174 16,164 16,554 2019 15,671 15,728 17,628 17,462 17,820 14,254 18,349 15,077 16,491 17,471 17,737 19,018 Trade balance fob-cif (US$ m) 2017 -4,344 -3,736 -4,547 -4,928 -7,341 -6,048 -8,879 -5,913 -8,168 -7,305 -6,359 -9,239 2018 -9,088 -5,789 -5,882 -6,710 -7,810 -5,525 -6,009 -2,472 -1,929 -497 -672 -2,744 2019 -2,491 -2,156 -2,165 -2,999 -1,878 -3,188 -3,218 -2,573 -2,074 -1,823 -2,234 -4,325 Foreign-exchange reserves excl gold (US$ m) 2017 90,513 90,929 88,575 84,988 87,443 90,197 87,976 91,473 91,507 96,174 92,267 84,115 2018 90,008 89,422 84,700 86,837 82,836 75,566 78,335 70,272 66,976 67,646 71,685 72,867 2019 76,301 79,086 75,404 72,187 75,033 73,542 75,787 75,789 75,224 77,965 78,269 n/a Sources: IMF, International Financial Statistics; OECD, Main Economic Indicators; Haver Analytics.

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25 Turkey 14 Annual trends charts

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26 Turkey 15 Quarterly trends charts

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27 Turkey 16 Monthly trends charts

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28 Turkey 17 Comparative economic indicators

Basic data Land area 783,562 sq km (including lakes and islands): of which 30% arable; 3% orchards, olive groves and vineyards; 26% classified as forest Population 79,814,871 (end-2016 estimate, Turkstat)

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29 Turkey 18 Main towns Population (end-2016) Istanbul: 14,804,116 Ankara (capital): 5,346,518 Izmir: 4,223,545 Bursa: 2,901,396 Antalya: 2,328,555 Climate Mediterranean on the south coast, continental inland Weather in Ankara (altitude 861 metres) Hottest month, August, 15­31°C (average daily minimum and maximum); coldest month, January, ­ 4­4°C; driest month, August, 10 mm average rainfall; wettest month, December, 48 mm average rainfall Language Turkish Measures Metric system Currency Turkish lira = 100 kurus Time 3 hours ahead of GMT all year round Fiscal year Calendar year Public holidays January 1st (New Year's Day); April 23rd (National Sovereignty and Children's Day); May 1st (Labour and Solidarity Day); May 19th (Ataturk Memorial, Youth and Sports Day); July 15th (Democracy and National Solidarity Day); three days for Ramadan and four days for Kurban or Eid (dates vary according to the Muslim calendar); August 30th (Victory Day); October 29th (Republic Day)

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30 Turkey 19

Political structure Official name Republic of Turkey Form of state Presidential system since June 2018 following a constitutional referendum in April 2017. Previously a parliamentary republic Legal system Based on European models and the constitution of 1982, which has undergone a series of amendments, with the latest introducing a presidential system of government National legislature Unicameral Meclis (parliament) of 600 members directly elected for a five-year term Electoral system Universal direct suffrage over the age of 18. Only parties with more than 10% of the national vote are eligible for seats in parliament. Individuals may run as independents National elections Last parliamentary and presidential elections: June 24th 2018. The next parliamentary and presidential elections are due to be held by June 18th 2023 Head of state Recep Tayyip Erdogan. Under the amended constitution that has been in effect since June 24th,

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31 Turkey 20 the president is allowed to serve two further five-year terms National government The government is headed by the president. The post of prime minister has been abolished following the June 2018 elections Main political parties Six parties exceeded the 10% national vote threshold for parliamentary representation at the June 2018 election: Justice and Development Party (AKP) and Nationalist Action Party (MHP) as a coalition (the People's Alliance); Republican People's Party (CHP), Good Party (IP) and Felicity Party (SP) as a coalition (the National Alliance); Peoples' Democratic Party (HDP) Members of the government Vice-president: Fuat Oktay Key ministers Agriculture & forestry: Bekir Pakdemirli Commerce: Rushar Pekcan Culture & tourism: Mehmet Ersoy Defence: Hulusi Akar Education: Ziya Selcuk Energy & natural resources: Fatih Donmez Environment & urban planning: Murat Kurum Foreign affairs: Mevlut Cavusoglu Health: Fahrettin Koca Industry & development: Mustafa Varank Interior: Suleyman Soylu Justice: Abdulhamit Gul Labour, social services & family: Zehra Zumrut Selcuk Transport & infrastructure: Cahit Turan Treasury & finance: Berat Albayrak Youth & sport: Mehmet Muharrem Kasapoglu Central bank governor Murat Uysal

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32 Turkey 21 Recent analysis

Generated on January 23rd 2020 The following articles were published on our website in the period between our previous forecast and this one, and serve here as a review of the developments that shaped our outlook. Politics Forecast updates WTO's dispute-settlement mechanism collapses December 11, 2019: International relations Event On December 10th two of the three remaining judges on the appellate body of the World Trade Organisation (WTO)—the main dispute­settlement body of that institution—retired from service. As a minimum quorum of three judges is required for the appellate body to function, the event effectively marked the collapse of the WTO's dispute-settlement mechanism. Analysis The US has had long-standing grievances with the appellate body (and the WTO more generally), even in the face of several WTO cases that it has won recently. These objections also predated the administration of Donald Trump, the current US president. US concerns over the role of the appellate body—including allegations that it had overstepped its jurisdiction—arose during the presidency of George W Bush (2000­08), whose administration took issue with the body's findings that the US methodology for calculating anti-dumping and countervailing duties (a controversial practice known as "zeroing") were not WTO-compliant. This attitude hardened under the presidency of Barack Obama (2008-12), who blocked the reappointment of two appellate body judges (and obstructed consensus over the appointment of a third) during his time in office. Mr Trump has since maintained this strategy of blocking appointments. The Economist Intelligence Unit had expected this outcome because of the president's long-harboured hostility towards the WTO. However, the collapse of the dispute-settlement mechanism will not immediately spell doom for either the WTO itself or the future of global commerce. We continue to expect global trade growth (by volume) to rebound modestly into positive territory in 2020, as the world acclimatises to the "new normal" of US-China economic tension and trade demand stabilises across major markets. Nevertheless, the dissolution of the WTO's main dispute-settlement mechanism will erode important constraints on protectionist bad behaviour. There is now a growing risk that the lack of an international arbiter will allow both existing and future trade disputes to escalate more quickly. This will be particularly critical as the US-China trade war persists into 2020, while emerging disputes elsewhere—such as between South Korea and Japan, France and the US and the EU and Malaysia—weigh on the prospects of trade liberalisation more generally. Without the appellate body, these and other potential trade conflicts will continue to cast a shadow over world trade next year. Impact on the forecast We had anticipated that the WTO appellate body would cease to function by December, and have already built this event into our forecasts from 2020 onwards.

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33 Turkey 22

Erdogan ready to back GNA forces December 18, 2019: Political stability Event On December 15th the Turkish president, Recep Tayyip Erdogan, stated that Turkey stood ready to provide Libya's UN-recognised Government of National Accord (GNA) "whatever support necessary"—in effect reiterating a statement made several days earlier expressing willingness to send Turkish troops to Libya. Analysis Mr Erdogan's remarks came the day after a Libyan-Turkish security agreement that commits Turkey to sending a "rapid reaction force", should the GNA request one, was submitted to the Turkish parliament. Turkey and the GNA signed the security agreement in November, alongside a controversial maritime boundaries agreement. Turkey is thought to have already sent troops to Libya to help pro-GNA forces with the deployment of Turkish-supplied military equipment and to operate Turkish-produced drones. Similarly, Emirati operatives are thought to be helping to operate UAE-supplied Chinese drones for a rival force, the self-styled Libyan National Army (LNA), and Egyptian/Emirati manned aircraft have carried out strikes on behalf of the LNA. However, the agreement appears to offer the prospect of Turkish troops fighting openly on behalf of the GNA. Turkey's apparent willingness to make troops available to defend the GNA comes as speculation mounts that the reported deployment since September of over 1,000 Russian mercenaries by a Kremlin-linked organisation to support the LNA will enable the latter to break the long-standing stalemate in the battle for control of the capital, Tripoli, allowing LNA forces to enter the city. The extent to which such mercenaries are actually involved in fighting on the front lines remains unclear. However, fighting has reportedly intensified in recent days in the wake of a new LNA push to take the city, with pro-GNA Misratan militias having reportedly remobilised to defend the city. Mr Erdogan and the Russian president, Vladimir Putin, discussed the Libyan situation in a phone call on December 11th and are to meet in January 2020 for further talks on the matter. Having recently co-operated in relation to developments in Syria, the two are likely to hope to avoid a confrontation over Libya, and it is plausible that Mr Erdogan is hoping to persuade Russia and other LNA backers to maintain the status quo by signalling that he would not allow the LNA to take Tripoli, rather than having to actually send Turkish troops to fight in Libya. Impact of the forecast The developments underscore our view that foreign involvement will serve to prolong the conflict in the near term. We do not expect Turkish-Russian relations to suffer.

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Libyan military college attacked in air strike January 9, 2020: Political stability Event On January 4th a Libyan military academy located in a southern district of the capital, Tripoli, was targeted in an aerial bombing, killing at least 30 cadets and injuring 33 others. Analysis The air strike comes amid an increase in fighting, with forces affiliated to the UN-recognised Government of National Accord (GNA) battling troops loyal to the self-styled Libyan National Army (LNA) for control of Tripoli. The head of the UN Support Mission in Libya, Ghassan Salamé, said that the strike was conducted "by a drone attack probably done by a country supporting the LNA". In addition, the GNA's foreign ministry called for referring the leader of the LNA, Khalifa Haftar, and his aides, to the International Criminal Court on charges of committing "crimes against humanity". The LNA has intensified its shelling of civilian areas and residential neighborhoods throughout the capital in order to push for an end to the long-standing stalemate, which has also moved foreign powers to play a more direct role. Since the LNA commenced its assault on the capital on 4th April, the campaign has failed to make a breakthrough, which could help to explain Mr Haftar's announcement on December 12th declaring the launch of a "decisive battle" to capture Tripoli. This comes following a controversial maritime boundaries agreement signed by the GNA and Turkey, which included a request for Turkish soldiers to intervene. Consequently, on January 2nd Turkey's parliament approved the deployment of troops to Libya, adhering to the earlier request by the GNA for enhanced military support. In response to Turkey's aggressive actions, Mr Haftar urged Libyans to take up arms against Turkish troops in a televised address on January 3rd, proclaiming that "we accept the challenge and declare jihad and a call to arms". Furthermore, attacks on January 3rd, believed to be perpetrated by LNA fighters, forced Mitiga International Airport—Tripoli's only functioning civil aviation facility—to shut down once again, having been closed since September, owing to repeated rocket strikes. According to the UN, the uptick in aerial attacks and shelling has killed at least 11 civilians since early December. Impact on the forecast The developments underscore our view that foreign involvement will prolong the conflict and increase instability. For Turkey, the operation is risky as it has weak domestic support, and a protracted military operation in Libya could have damaging political consequences, especially if there are casualties. We will highlight this in our next report.

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Diplomatic pressure to end the fighting in Libya intensifies January 9, 2020: Political stability Event On January 6th Libya's UN-recognised prime minister, Fayez al-Serraj, and several of his Government of National Accord (GNA) ministers, visited Algeria's recently elected president, Abdelmajid Tebboune, to "discuss ways to resolve the difficult situation" in Libya. Analysis As fighting throughout the capital, Tripoli, intensifies, co-operation with regional allies becomes even more paramount. The Algerian authorities strongly rejected any foreign intervention in Libya, which could cause a conflict to erupt on its border, and agreed to play a role in resolving the Libyan crisis. Libya and Algeria share a border of nearly 1,000 km, where weapons and fighters are smuggled across the porous, largely ungoverned stretch of territory, threatening to destabilise Algeria. Mr Tebboune went on to say that Tripoli is "a red line no one should cross", which was probably a reference to reports that Russian mercenaries are fighting on behalf the self-styled Libyan National Army (LNA) in Tripoli and to the deployment of Turkish troops to prop up the GNA. In addition, on January 8th the Russian president, Vladimir Putin, travelled to Turkey to inaugurate a new pipeline carrying gas to Europe, and met the Turkish president, Recep Tayyip Erdogan. The Libyan conflict was a hot topic of discussion and both leaders called for a ceasefire to come into force at midnight on January 12th. The ceasefire is aimed at supporting the resumption of negotiations backed by the UN between the GNA and the LNA, while advancing peace talks scheduled for next month in Berlin. Russia and Turkey released a joint statement to "declare a sustainable ceasefire, supported by the necessary measures to be taken for stabilising the situation on the ground and normalising daily life in Tripoli and other cities". The statement was somewhat surprising considering that the two countries actively back rival sides, with Turkey supporting the GNA and Russia aiding the LNA, further indicating the opportunism of their bids at the moment to act as power brokers. Impact on the forecast Despite encouraging developments, the long-standing stalemate in the battle for control of Tripoli will make the formation of a unity government unlikely until 2021 at the earliest. We also continue to believe that Turkish-Russian relations will not suffer from the ongoing events in Libya.

Analysis Turkey: the political outlook for 2020 December 11, 2019: Country outlook The Economist Intelligence Unit's baseline medium­term forecast is that—amid ongoing political tensions and economic travails—the ruling Justice and Development Party (AKP), led by the president, Recep Tayyip Erdogan, will remain in power until mid-2023 (when the next presidential and parliamentary elections are due), and probably beyond. However, 2020 is likely to be another challenging year for Turkey, as we expect Mr Erdogan —and the AKP—to continue the clampdown on their political opponents and critics, in response to domestic political tensions and a more galvanised opposition. External relations are also likely to remain a potential source of instability as tensions with Turkey's traditional Western allies, especially the US and the EU, persist. The AKP and Mr Erdogan have dominated Turkey's political scene since coming to power in November 2002. During this period they have tightened their grip on authority, by replacing Turkey's parliamentary system of government with an executive presidential system that has concentrated control in the hands of Mr Erdogan and by clamping down on all forms of political opposition. The economy has become less stable in recent years as a result of domestic political tensions, fraught international relations and unorthodox economic policies. This has jeopardised

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36 Turkey 25 eroding the hard-won improvements in macroeconomic stability on which the AKP built much of its electoral success in the early years of its dominance. Our baseline medium-term forecast is that the AKP and Mr Erdogan, who came close to being overthrown in an attempted coup by parts of the military in July 2016, will remain in power until mid-2023 (when the next presidential and parliamentary elections will occur), and probably beyond. We also expect that the AKP government will continue to favour economic policies aimed at reviving fast, credit-fuelled economic growth in the years leading up to the 2023 elections, but that policymaking will be more orthodox than in recent years. Domestic politics: clampdown on opponents and critics set to continue With the next presidential and parliamentary elections still three and a half years away, the AKP and Mr Erdogan have a window of opportunity to address Turkey's deepening social, and political, polarisation. However, they are unlikely to take that route for as long as the AKP remains in the People's Alliance with the smaller hard-right Nationalist Action Party (MHP). As a result, we expect domestic political tensions to continue in 2020 amid the government's clampdown on political opponents and critics, including the pro-Kurdish Peoples' Democratic Party (HDP), non- governmental organisations and journalists. In the local elections in March 2019 the AKP and the MHP retained a majority of the national vote, but lost in major cities such as Ankara, the capital, and Istanbul, the country's largest city, which accounts for about 30% of national output. These losses, particularly in the controversial Istanbul election rerun in June, were a severe blow to the credibility of Mr Erdogan and the AKP. This has helped to galvanise the political opposition and two former AKP heavyweights, Ali Babacan and Ahmet Davutoglu, who are preparing to launch new centre-right parties in the coming months to challenge Mr Erdogan. Mr Erdogan's reaction to the electoral losses has unsurprisingly been to double down, rather than change tack. In order to continue his dominance of Turkish politics, we expect him to maintain his tight grip on national institutions and the media. He will also continue to use foreign policy to fuel nationalist sentiment, and portray himself as a strong leader defending Turkey against domestic and foreign threats. We believe that speculation in recent months that Mr Erdogan might call snap elections in 2020 appears overdone, but this cannot be completely ruled out. The government's decision to launch a cross-border military operation into north-eastern Syria in order to clear the area of US-backed Syrian Kurdish groups, and create a buffer zone where Turkey could resettle some of its 3.5m Syrian refugees, won broad public and political approval in Turkey. It also caused a division between the main opposition National Alliance, comprising the Republican People's Party (CHP) and the Good Party (IP), which both supported the incursion, and the HDP, whose co-operation with the CHP as well as the IP in the municipal elections contributed significantly to the defeat of the AKP's mayoral candidates in Ankara and Istanbul. Furthermore, by holding early elections, Mr Erdogan might be able to stifle the impact of the launch of Mr Babacan's and Mr Davutoglu's new parties. International relations: tensions to remain high An increasingly multipolar world, national security threats, Turkey's suspicion of its traditional Western allies since the attempted coup in July 2016, growing Turkish nationalism and the government's ambition to establish the country as a regional power have all contributed to a shift in foreign policy approach under the AKP. This shift has led to Turkey adopting a more assertive stance with the US, the EU and several core EU member states, and establishing closer relations with countries with which it previously had rivalries or limited ties, and that are deemed a threat to the West—such as Russia and China. This has also left Turkey strategically isolated, calling into question its continued membership of NATO and its declared goal of joining the EU one day. Despite Mr Erdogan's strong personal relationship with the US president, Donald Trump, Turkey- US relations are likely to remain tense in 2020 and beyond. The main trigger for a further deterioration in 2020 could be the possible imposition of sanctions on Turkey by the US for its purchase of the Russian S-400 anti-missile system, its latest incursion into Syria because of its potentially negative impact on the US-led war against Islamic State (IS) as well as the alleged violations of US sanctions against Iran by Halkbank, a Turkish state-owned bank.

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Relations with the EU are also unlikely to improve in 2020 and beyond, even if we think that it is unlikely that either side will move to formally end Turkey's moribund EU membership negotiations. The main areas of tension are likely to be regarding the EU-Turkey action plan to curb the flow of migrants through Turkey to the EU, and Turkey's insistence that EU countries accept the repatriation of IS fighters and sympathisers that originated from EU countries (who are currently being held in Turkey and Turkish-controlled areas in Syria). Oil, and gas, exploration by Turkey and the Republic of Cyprus in the eastern Mediterranean also has the potential to further damage relations, and possibly even spark a military confrontation. The EU has admonished Turkey for its "unauthorised" and "illegal" drilling activities in disputed waters in the eastern Mediterranean as a violation of Cyprus exclusive economic zone. Turkey has long disputed Cyprus' claim to some areas of the EEZ, arguing that they lie inside its continental shelf. Turkey also argues that until Greek and Turkish Cypriots reach a settlement regarding the division of the island, Cyprus' gas exploration in Cypriot waters violates Turkish Cypriots' rights.

Malaysian summit underlines Gulf tensions December 24, 2019 A summit convened by Malaysia to discuss issues facing Muslims worldwide has ended up highlighting the deepening faultlines in the Islamic world, centred around those in the Gulf. Saudi Arabia refused to attend on the basis that such topics should be handled through the Organisation of Islamic Co-operation (OIC), a Jeddah-based body, and flexed the kingdom's economic muscles by forcing a last-minute withdrawal by Pakistan. The heads of state of Iran, Qatar and Turkey—Saudi Arabia's regional nemeses—were the most senior foreign attendees, with the Iranian president using the forum to drum up sympathy for his country's treatment by the US. The idea for the conclave held in Kuala Lumpur, the Malaysian capital, on December 18th-21st had its roots in controversy over the response of the OIC to Muslim issues when that response was at odds with the foreign policy of Saudi Arabia, traditionally the organisation's dominant power: Mahathir Mohamad, Malaysia's prime minister, first proposed the summit during the UN General Assembly in September, in the aftermath of India's decision in the previous month to revoke the autonomous status of Jammu & Kashmir, a Muslim-dominated province in the north- west, which is disputed with Pakistan, and the associated security crackdown. The move was nominally "deplored" by the OIC but attracted little public criticism from Saudi Arabia and the UAE, the kingdom's closest regional ally, which have forged strong political and economic links with India in recent years. Since his election in May 2018 Dr Mahathir has unwound the close ties with the kingdom, which were controversially developed by his disgraced predecessor, Najib Razak, shutting down the King Salman Centre for International Peace, an anti-terrorism institution in Kuala Lumpur inaugurated in February 2017 during a landmark state visit by the eponymous Saudi monarch and withdrawing from the Saudi-led coalition fighting Houthis (Iranian-backed rebels) in Yemen. According to a notice carried by the Saudi Press Agency (the state news agency), King Salman told the Malaysian president in a telephone call on December 17th that the OIC was the proper forum for discussing Muslim issues, reportedly reiterating that the kingdom would participate in the gathering only if it was held under that body's auspices. Anwar Gargash, the UAE's foreign affairs minister, issued a statement to similar effect. GCC division remains regarding Iran Divisions in the Islamic world and their microcosm in the Gulf were highlighted by the countries that did choose to send their heads of state, namely Iran, Qatar and Turkey, which have all clashed with Saudi Arabia over alleged support for Islamist political groups considered as terrorists by the kingdom. Hassan Rouhani, Iran's president, embraced the international platform to decry US sanctions against the Islamic Republic, placed in the crowd-pleasing context of wider condemnation of international interference in the Muslim affairs, and he earned a public statement of support from Dr Mahathir during the latter's keynote address. Sheikh Tamim bin Hamad al- Thani, the emir of Qatar, kept a lower profile, possibly reflecting a disinclination to further antagonise Saudi Arabia amid recent signs of rapprochement and a possible end to the two-and-a- half-year Saudi and UAE-led blockade of his country. Nonetheless, a bilateral meeting with Mr Rouhani concluded with a restatement of the pair's close relations—the central complaint of the boycotting quartet—and solidarity in the face of respective sanctions.

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38 Turkey 27 Saudi Arabia's vast financial leverage forces Pakistan into humiliating cancellation The controversy surrounding the Malaysian initiative made headlines just days before its opening, when Imran Khan, Pakistan's prime minister and originally an enthusiastic supporter of the summit in reflection of its Kashmiri genesis suddenly withdrew after a brief visit to Saudi Arabia for talks with Mohammed bin Salman al-Saud, the crown prince and de facto ruler. The Pakistani premier was widely reported to have been instructed to cancel his attendance, on pain of losing some of the US$6bn in aid pledged by the kingdom to ease urgent fiscal difficulties shortly after his election in July 2018. Far from being a forum to unify the Islamic world, the Kuala Lumpur summit thus instead showcased the hardening of antipathetical blocks therein, based on the competition for pre- eminence between Saudi Arabia and its Gulf allies on the one hand and Iran and proponents of political Islam on the other. We expect the conflict to continue to dominate politics in the Gulf and fuel proxy conflicts in the wider Middle East throughout the 2020-24 forecast period.

Libyan civil conflict heats up January 9, 2020: Domestic politics Libya's civil conflict continues to escalate, with a mass-casualty drone strike on forces aligned with the UN-recognised Government of National Accord (GNA) in recent days, as well as the capture of the city of Sirte by its rival, the self-styled Libyan National Army (LNA). In an effort to arrest the LNA's growing momentum—itself in large part the result of stepped­up foreign support—Turkey appears to be fast­tracking efforts to shore up its GNA allies, prompting international alarm at the prospect of a deepening regional conflagration in Libya. Despite its growing concern, the international community remains divided over the conflict and reluctant to apply any real pressure on some of the major drivers of the escalating battle, and the prospects of planned initiatives to resolve or even substantially de-escalate it continue to appear slim. LNA advance On January 6th a spokesman for the LNA announced that it had captured the central coastal city of Sirte, in what would amount to a major gain for the force and a serious blow to the GNA. Most of the city appears to have fallen to the LNA in a single day. Sirte hosts significant oil export infrastructure (although the GNA's control of the central bank accounts into which oil export revenue is paid reduces the importance of the physical control of such infrastructure). The next major city west along the coast of Sirte is Misurata, the third-largest city in the country and a stronghold of militias fighting in support of the GNA, although the LNA spokesman ruled out launching an offensive against it in the near future. The capture of Sirte underscores a growing shift in the conflict's momentum in favour of the LNA. This is primarily the result of two recent developments: the arrival since September of well over 1,000 pro-LNA Russian mercenaries and a shift in the balance of a long-running drone war between the two sides (using aircraft thought to be supplied and operated by the UAE on behalf of the LNA, and Turkey on behalf of the GNA) in the LNA's favour. Emphasising the latter point, a drone attack on January 4th killed at least 30 (GNA-aligned) cadets at a military academy in Tripoli. The LNA has also reportedly recruited more Sudanese mercenaries in recent weeks, supplementing forces from Sudan already fighting on its behalf. Turkish deployments In response to the growing likelihood of the LNA breaking through GNA lines around Tripoli, the GNA's main backer, Turkey, has been stepping up its efforts to shore up its beleaguered Libyan allies. On January 5th the Turkish president, Recep Tayyip Erdogan, confirmed that Turkish military units had begun to deploy to Libya (although the number of troops deployed remains small thus far), following the Turkish parliament's fast-tracked approval three days earlier. Turkey's move is also driven by a deal signed in November with the Libyan government on the delimitation of maritime borders in the Mediterranean in return for its military support against

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39 Turkey 28 Haftar. Mr Erdogan said that the troops would establish an operations centre in Libya headed by a Turkish lieutenant-general, although he added that Turkish forces would not serve in the conflict as "combatant forces", which would rather be drawn from "different units". It was unclear to what Mr Erdogan was referring, but Turkish officials have suggested that their forces may train pro-GNA units, and in late December local Turkish media cited an unnamed Turkish official saying in effect that Turkey could dispatch Turkish-backed Syrian fighters to Libya to support the GNA. International reaction Such escalation, and the growing involvement of Russian and Turkish forces in particular, is prompting growing international concern. On January 5th the US embassy in Libya issued a statement condemning recent developments in the conflict, including the military academy attack and recent shelling of Mitiga International Airport, Tripoli's only functioning civil aviation facility (which has closed once again), as well as growing Russian and Turkish involvement. This followed a phone call from the US president, Donald Trump, to Mr Erdogan in which the former said that outside forces were complicating the situation in Libya. On January 7th leading EU member states and Josep Borrell, the EU's high representative for foreign affairs, met to discuss the crisis, with Mr Borrell confirming that the EU rejects the deployment of Turkish troops to Libya. Nonetheless, there remains little indication of any sort of effective international response to the escalating conflict being mounted in the near future. An international conference to take steps towards resolving the conflict and addressing the provision of weapons to both sides in violation of a UN embargo, which was initially set to take place late in 2019, has been repeatedly postponed, with an official scheduled date still yet to be announced. The international community has repeatedly criticised the LNA's offensive and apparent war crimes, abuses and escalatory steps committed by the LNA in particular, as well as violations of the arms embargo on behalf of both sides, but has taken little in the way of serious action against perpetrators. This is unsurprising, given that factors such as divisions over the issue, not only between leading powers (with France and Russia sympathetic to the LNA, while the wider EU is more hostile to the LNA's offensive), but also within the Trump administration, where the State Department, which is opposed to the LNA offensive, is contending with Trump advisers close to leading LNA supporter the UAE. Underscoring this, in its statement on January 5th the US identified both Turkish and Russian involvement (on opposing sides) as causing problems in Libya, but failed to name the UAE in this regard, despite its long-standing military support for the LNA and its apparent significant role in the recent escalation, including the military academy attack. On January 6th the UN's special envoy to Libya, Ghassan Salamé, blamed a "country supporting the LNA", in what was almost certainly a reference to the UAE, although he too failed to name it explicitly. With the international community divided and unwilling to even identify key actors that are encouraging the fighting and international attention distracted by the unfolding Iran crisis, it remains hard to envisage a successful attempt to bring about a resolution to the conflict in Libya in the near future. Russia and Turkey agree ceasefire On January 8th Russia and Turkey, despite being on opposite sides, jointly called for a ceasefire in Libya, which will go into force at midnight on January 12th. Russia and Turkey appear to be positioning themselves in the void left by Western powers, which have failed to resolve the dispute so far. After their interventions in Syria, Russia and Turkey continue to work on their objective of playing a leading role on the global stage. The ceasefire is unlikely to represent a major breakthrough in the Libyan conflict, but Mr Erdogan and his Russian counterpart, Vladimir Putin, are attempting to define the terms of a potential framework for future peace talks in Libya.

Economy Forecast updates Annual inflation rises above 10% in November December 9, 2019: Inflation

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40 Turkey 29 Event The consumer price index (CPI) rose by a relatively low 0.4% month on month in November 2019, according to the Turkish Statistical Institute (TurkStat). However, annual price inflation accelerated to 10.6%, from 8.6% in October. This was owing to a strong baseline effect: in November 2018 prices fell by 1.4% after extraordinary increases in the preceding months. Analysis Annual inflation reached 25.2% in October 2018 in the wake of a sharp depreciation of the lira against major currencies. However, the lira subsequently stabilised, and inflation has returned to near pre-crisis levels. In November 2019 prices continued to rise in most categories of goods and services. Almost half of the monthly increase in prices stemmed from the continuing seasonal increase in clothing and footwear prices, which rose by 2.7% from October. Despite this, prices of clothing and footwear are only 2.2% higher than a year ago, pointing to ample supply and competition in this sector and subdued domestic demand. In most other categories, annual inflation ranged between 8% and 10% in November. Prices of food and non-alcoholic beverages increased by 8.9%, and prices of goods and services for transport rose by 8.7%. Price increases in these categories were among the main drivers of inflation in 2017-18. In 2019, however, a better harvest appears to have helped to hold fresh produce prices down, whereas weak global oil prices have cut the annual increase in motor fuels to 2.9% as at November. In contrast, the annual increases in the prices of many services remain high: as at November prices were up by 13.9% in health, 14.4% in education, 13.1% in hotels and catering, and 14% in miscellaneous goods and services, which include financial services. The annual increase in alcoholic drinks and tobacco stands at 43.4%, owing to successive tax increases between April and August.

Consumer prices (% change year on year, unless otherwise indicated) 2018 2019 Nov Dec Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Consumer prices 21.6 20.3 20.4 19.7 19.7 19.5 18.7 15.7 16.6 15.0 9.3 8.6 10.6 % change, month on month -1.4 -0.4 1.1 0.2 1.0 1.7 0.9 0.0 1.4 0.9 1.0 2.0 0.4 Food & non-alcoholic beverages 25.7 25.1 31.0 29.3 29.8 31.9 28.4 19.2 18.2 17.2 9.5 7.8 8.9 % change, month on month -0.7 1.1 6.4 0.9 2.4 1.4 -1.2 -1.6 -1.1 -0.8 -0.6 1.7 0.2 Clothing & footwear 16.9 14.8 12.5 11.6 11.0 5.9 4.8 4.3 4.2 4.7 2.8 1.9 2.2 % change, month on month 2.4 -4.1 -8.0 -4.8 0.5 5.4 4.0 -1.6 -3.2 -1.1 2.1 11.7 2.7 Housing, water, electricity, gas 24.8 23.7 17.2 16.6 16.4 15.3 14.7 13.8 16.0 14.0 10.3 9.7 9.6 & other fuels % change, month on month 0.5 -0.1 -3.1 0.0 0.3 0.4 0.4 0.3 3.1 2.0 2.2 3.5 0.4 Household goods 32.7 31.4 29.1 27.6 27.0 27.6 24.5 22.5 25.4 20.1 8.7 6.1 9.8 % change, month on month -2.9 0.1 0.7 0.1 0.3 2.6 -1.6 0.6 4.2 0.2 0.8 1.0 0.6 Transport 21.0 16.0 14.7 15.2 15.2 12.6 12.4 10.0 13.7 6.7 -0.7 1.4 8.7 % change, month on month -6.5 -2.6 0.2 0.7 0.7 1.2 2.2 0.5 4.5 -1.9 1.6 1.2 0.3 Source: TurkStat. Headline inflation will rise further in December owing to a baseline effect similar to that experienced in November. In 2020 there is scope for inflation to fall back into single figures once again, provided that the lira remains stable and international oil prices relatively subdued. Turkey's long history of high inflation and inflationary expectations, government pressure on the Central Bank of Turkey to lower interest rates and the likelihood of some acceleration in domestic demand are upside risks. Impact on the forecast There are upside risks to our average annual consumer price inflation estimate of 14.8% in 2019 and our forecast for 9.7% in 2020.

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Current-account surplus starts to narrow December 13, 2019: External sector Event In October 2019 the current account showed a surplus of US$1.5bn compared with a surplus of US$2.6bn in the same month of 2018, according to the Central Bank of Turkey. Analysis Turkey has usually run substantial current-account deficits, offset by net inflows of capital from abroad. Since 2018, however, capital inflows have been weak, while the current-account balance has improved dramatically. The trade deficit—which constitutes the largest component of the current account—has shrunk in line with the weak lira and the economic slowdown. Meanwhile, a rising surplus on the services balance—which includes tourism revenue—has also helped to improve the current account. As a result, Turkey had a current-account surplus of US$4.8bn in January-October 2019 compared with a deficit of US$33.1bn a year earlier.

Balance of payments (US$ m) 2016 2017 2018 2018 2019 Year Year Year Jan-Oct Jan-Oct Current-account balance -33,139 -47,347 -27,158 -26,675 4,819 Foreign trade balance (fob-fob) -40,892 -58,955 -41,916 -40,558 -14,009 Services balance 15,263 19,938 25,831 23,045 28,227 Primary income balance -9,183 -11,044 -11,927 -9,671 -10,250 Secondary income balance 1,673 2,714 854 509.0 851.0 Capital account & financial account, excl reserves 22,848 38,526 -2,438 -5,558 -1,149 Change in reserve assets 813.0 -8,207 -10,377 -15,157 6,120 Net errors & omissions 11,104 614.0 19,219 17,076 2,450 Source: Central Bank of Turkey. The trend is now changing again. Since August the trade deficit has started to widen on a year- on-year basis. In the month of October, exports were only 1.3% higher than a year earlier, at US$16.5bn, while imports rose by 11.3% to US$17.4bn. Aside from baseline effects, this reflects the recovery in domestic demand for goods and the relative weakness of export markets and export prices. October's trade deficit of US$924bn was more than offset by a surplus of US$3.4bn on the services balance, ensuring that the monthly current-account balance remained in surplus, albeit lower than in October 2018. Figures for the winter months, when tourism revenue is lower for seasonal reasons, are likely to show current-account deficits. These will need to be financed by attracting net capital inflows or using central bank reserves. The latest balance-of-payments data show that capital flows remained balanced in October, a month when foreign investors sold Turkish bonds and shares, and the government, banks and companies were net redeemers of debt. The gross foreign-exchange reserves of the central bank stood at US$78.3m on November 29th. Our expectation is that net capital inflows will be sufficient to permit a moderate increase in the current-account deficit in 2020, consistent with a pick-up in GDP growth, without destabilising the lira. Impact on the forecast We expected a current-account deficit of 0.2% of GDP in 2019 but we will revise our estimate in light of the latest data to a small current-account surplus in 2019. We forecast that the current- account deficit will widen again moderately to 1.1% of GDP in 2020 and 2.7% in 2021 as economic growth resumes.

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Central bank cuts repo rate to 12% December 13, 2019: Monetary policy outlook Event On September 12th the Monetary Policy Committee (MPC) of the Central Bank of Turkey reduced the bank's main policy rate—the one­week repurchase (repo) lending rate—from 14% to 12%. Analysis The policy rate has now been reduced by a total of 1,200 basis points since July, when the president, Recep Tayyip Erdogan—a long­standing proponent of low interest rates—appointed Murat Uysal as the new central bank governor. The rate cuts have been made possible by a decline in the annual rate of consumer price inflation, which fell from a peak of 25.2% in October 2018 to 8.5% one year later, in parallel with the restoration of currency stability. The fact that major central banks have been loosening monetary policy has also created favourable conditions for reducing rates. In November, however, the annual inflation rate picked up to 10.6%. The MPC suggested that inflation would end 2019 close to the lower bound of its projection of 11.2-12.8%. With the main policy rate now barely above the current rate of inflation, the central bank has limited scope to cut rates. The government and the bank are officially aiming to reduce inflation permanently to 5% or less in the medium term. However, their main focus appears to be on accelerating the ongoing recovery in economic activity, including by stimulating credit growth. Moreover, Mr Erdogan denies that interest rates need to be maintained at a certain level in order to reduce inflation. On December 9th the central bank readjusted its mandatory reserve requirements in such a way as to increase the incentive for banks to achieve 5-15% real annual credit growth, and/or increase their long-term commercial and housing loans. In recent months the state-owned banks have been leading the way in cutting interest rates on mortgage and other loans, and increasing their credit volumes. The lira, which had been trading slightly weaker, at TL5.79-5.80:US$1 in the days leading up to the MPC meeting, firmed slightly after the news of the MPC decision, but soon returned to its previous level, confirming that the 200-basis-point rate cut was in line with market expectations. Impact on the forecast We expect the central bank rate cuts to be much smaller and less frequent in 2020. Overly hasty rate reductions, which could undermine the lira, pose risks to our inflation forecasts. We currently expect the annual inflation rate to decline moderately, to 9.5% at end-2020, from an estimated 11.3% at end-2019.

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Business sentiment improves, but consumers remain gloomy January 2, 2020: Economic growth Event The economic confidence index calculated by the Turkish Statistical Institute (Turkstat) increased to 93.8 points in December, from 91.3 in November. Analysis The economic confidence index is a composite index derived from the official consumer confidence index, and the official indices of confidence in the real sector (ie manufacturing) and the services, retail and construction sectors. This index reached a low of 75.2 points in October 2018, following the slide in the lira and the onset of the recession. It remained volatile in early 2019, but has been recovering more consistently in recent months, as economic activity has strengthened and inflation and interest rates have fallen. Nevertheless, the index remains below the 100-point mark, which notionally separates pessimism from optimism, for the composite index and each of its components. Confidence in the manufacturing sector has been relatively buoyant. The real sector confidence index reached 108.7 points in December. Industrialists reported stronger orders and improved prospects for investment, as well as greater satisfaction with the "general situation". By contrast, the consumer confidence index stood at only 58.8 points—down from 59.9 in November and almost unchanged from December 2018. Consumers remain worried about the prospects for wages and employment, and the economic situation in general.

Economic confidence (seasonally adjusted; above 100=optimism, below 100=pessimism) 2018 2019 Dec Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Composite economic 81.9 78.5 79.4 81.9 84.7 77.5 83.4 80.7 87.1 86.0 89.8 91.3 93.8 confidence index Consumer confidence 58.7 58.2 57.8 59.4 63.5 55.3 57.6 56.5 58.3 55.8 57.0 59.9 58.8 Real sector (manufacturing) 97.7 95.4 96.9 99.3 100.0 94.7 99.6 96.6 102.1 99.7 104.2 105.9 108.7 Services confidence 81.5 78.3 79.5 81.6 83.1 79.4 85.4 83.5 89.1 89.3 90.7 91.3 93.2 Retail trade confidence 96.4 92.5 90.8 90.7 90.6 89.9 93.2 90.4 95.0 97.6 102.3 101.2 102.6 Construction confidence 55.4 56.7 51.8 54.1 53.9 49.8 50.4 52.4 55.5 60.1 65.1 63.9 68.9 Source: Turkish Statistical Institute. The services, retail and construction confidence indices all rose slightly in December after appearing to flatten in November. Reduced mortgage rates, especially at state banks, have boosted construction sector confidence. The data for the confidence indicators were collected in the first half of December. Since then a number of developments have occurred that may affect business and consumer confidence at the start of 2020. On December 13th the Central Bank of Turkey cut its main policy interest rate from 14% to 12%. The minister of treasury and finance, Berat Albayrak, later announced that state banks would cut monthly interest on mortgages to 0.79% in January. On December 26th the minimum wage increase for 2020 was set at 15%. Meanwhile, the lira, which hovered at around TL5.75:US$1 from late October to mid-December, has weakened to TL5.95:US$1, possibly due to the approach of US sanctions and Ankara's plans to send forces to Libya. Impact on the forecast We continue to expect GDP to grow by 3.8% in 2020, compared with an estimated 0.1% in 2019, boosted by a rebound in private consumption.

Annual inflation ends 2019 at 11.8% January 6, 2020: Inflation

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44 Turkey 33 Event The consumer price index (CPI) rose by 0.7% month on month in December 2019, according to the Turkish Statistical Institute (TurkStat). Analysis Annual inflation, which averaged about 8.5% in 2004-17, reached 25.2% in October 2018 in the wake of a sharp depreciation of the lira against major currencies. Since then it has settled back. The 0.7% rise in the CPI in December 2019 was almost entirely owing to increases in prices of food and non-alcoholic beverages, partly because of the onset of the winter season.

Consumer prices (% change year on year, unless otherwise indicated) 2018 2019 Dec Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Consumer prices 20.3 20.4 19.7 19.7 19.5 18.7 15.7 16.6 15.0 9.3 8.6 10.6 11.8 % change, month on month -0.4 1.1 0.2 1.0 1.7 0.9 0.0 1.4 0.9 1.0 2.0 0.4 0.7 Food & non-alcoholic beverages 25.1 31.0 29.3 29.8 31.9 28.4 19.2 18.2 17.2 9.5 7.8 8.9 10.9 % change, month on month 1.1 6.4 0.9 2.4 1.4 -1.2 -1.6 -1.1 -0.8 -0.6 1.7 0.2 2.9 Clothing & footwear 14.8 12.5 11.6 11.0 5.9 4.8 4.3 4.2 4.7 2.8 1.9 2.2 4.5 % change, month on month -4.1 -8.0 -4.8 0.5 5.4 4.0 -1.6 -3.2 -1.1 2.1 11.7 2.7 -1.9 Housing, water, electricity, gas 23.7 17.2 16.6 16.4 15.3 14.7 13.8 16.0 14.0 10.3 9.7 9.6 9.9 & other fuels % change, month on month -0.1 -3.1 0.0 0.3 0.4 0.4 0.3 3.1 2.0 2.2 3.5 0.4 0.2 Household goods 31.4 29.1 27.6 27.0 27.6 24.5 22.5 25.4 20.1 8.7 6.1 9.8 9.8 % change, month on month 0.1 0.7 0.1 0.3 2.6 -1.6 0.6 4.2 0.2 0.8 1.0 0.6 0.1 Transport 16.0 14.7 15.2 15.2 12.6 12.4 10.0 13.7 6.7 -0.7 1.4 8.7 12.2 % change, month on month -2.6 0.2 0.7 0.7 1.2 2.2 0.5 4.5 -1.9 1.6 1.2 0.3 0.6 Source: TurkStat. In its most recent inflation report, the Central Bank of Turkey projected that the annual rate of inflation would fall to 8.2% by end-2020 and 5.4% by end-2021. In practice, we expect the annual rate of inflation to undulate over the next few months and decline only very moderately later in the year. Obstacles to reducing inflation further include the impact of Turkey's long history of high inflationary expectations and the likelihood of some acceleration in domestic demand, particularly after the 15% new-year increase in the minimum wage. Inflation would also be negatively affected in the event of a poor agricultural harvest or an increase in international oil prices, which have surged so far this month owing to US air strikes in Iraq. Road and bridge tolls, and fees for various public services, were increased substantially on January 1st. Weaker public finances may require further increases in administered prices and indirect taxes in the months ahead. Above all, further lira weakness would force up the domestic prices of imported goods and seriously upset inflationary expectations. The lira is already weak by historical standards, global liquidity conditions are favourable and Turkish households are already keeping much of their savings in foreign-currency accounts. However, the traditional deficit on the current account is about to resume because of the winter season and the recovery in the economy. Meanwhile international tensions, the approach of US sanctions and the plans of Ankara (the capital) to send forces to Libya, which were approved by the parliament on January 2nd, have been keeping the lira under pressure. The government's insistence on low central bank and state bank interest rates may also undermine the currency. The Monetary Policy Committee of the central bank, which reduced its main policy rate further to 12% in December, holds its next meeting on January 16th. Impact on the forecast We continue to forecast 10.2% inflation at end-2020 and 9.2% at end-2021.

Country Report January 2020 www.eiu.com © Economist Intelligence Unit Limited 2020

45 Turkey 34

Trade deficit narrows to slightly less than US$30bn in 2019 January 7, 2020: External sector Event The merchandise trade deficit recorded US$29.9bn in 2019—according to preliminary customs­ based trade data published by the Ministry of Trade—down from US$54.3bn in 2018. Analysis The contraction in the trade deficit in 2019 reflected a fall in imports following the sharp depreciation of the lira against major currencies in mid-2018 and the subsequent recession. Imports fell by 9% year on year, to US$210.4bn, whereas exports rose by 2%, to US$180.5bn. Imports of capital goods and consumer goods declined particularly sharply—by 13.5% and 16.6% respectively—in 2019 as prices rose in lira terms, financial conditions tightened, and investor appetite and consumer spending power deteriorated. Imports of mineral oils and fuels edged down from US$43.6bn to US$41.7bn, reflecting subdued demand and lower international crude oil prices. In contrast, imports of precious stones and metals, which consist mainly of gold—the price of which increased—rose to US$13.4bn, from US$12.6bn in 2018. Exports rose by an estimated 2% in US dollar terms in 2019. Seasonally and calendar-adjusted data from the Turkish Statistical Institute show that the volume of exports increased by an average of 7.3% (compared with one year earlier) in the first ten months of 2019. However, low prices and the strength of the US dollar against other major currencies—particularly the euro—limited the increase in exports in US dollar terms. Exports to the US—affected by steel sanctions—and to major export markets in Europe declined, whereas exports to Iraq rose by 7.4%. However, since August 2019 the relative stability of the lira and the return to GDP growth have begun to reverse the downward trend in imports, as well as the narrowing of the trade deficit. Partly owing to a low baseline, the trade deficit has been widening year on year since August. Combined with the surplus on the services balance, which is dominated by tourism, the shrinking trade deficit caused Turkey to run an unusual current-account surplus in some months of late 2018 and 2019. The current-account balance for full-year 2019 may therefore show a slight surplus. The trade and current-account deficits are set to widen in the months ahead, but we expect capital inflows to be limited, the lira to remain weak by historical standards and the recovery in demand to be moderate, constraining the expansions of the deficits. Impact on the forecast The trade data are consistent with our most recent forecast for a current-account deficit of 1.2% of GDP in 2020, after an estimated 0.2% surplus in full-year 2019.

Analysis EIU global forecast - Another year of modest global growth December 10, 2019 The year 2019 was a difficult one for the global economy, as geopolitical uncertainty and a slowing Chinese economy combined to trigger a global manufacturing downturn. With some luck and monetary stimulus, we expect global growth to be marginally faster in 2020. However, continued political instability—internationally and in many countries—will limit any pick­up in business confidence and investment, and the balance of risks to the outlook remains tilted to the downside. Global growth is forecast to be 2.4% in 2020—modestly higher than the 2.3% growth that we currently expect for 2019, but still close to decade lows. We expect economic growth in the developed world to slow marginally in 2020, to 1.5%, driven by a moderation in US growth. Asia will record a stable growth rate of 4% in 2020, making it the world's fastest-growing region for the

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46 Turkey 35 sixth consecutive year, with stronger growth in South and South-East Asia making up for a continued slowdown in China. In the rest of the emerging world, we expect a modest recovery from a torrid 2019, including in Latin America, the Middle East and Sub-Saharan Africa. This growth outlook is supported by continued ultra-loose monetary policy among the world's major central banks, which will cushion demand in developed markets and limit the financial pressures that some heavily indebted emerging-market economies might otherwise face. However, it also assumes that economic and political conditions will stabilise in some of 2019's hotspots. Examples include Brazil, which has cleared the major hurdle of pension reform; Turkey, where the recent stabilisation in the currency is supporting a stabilisation in the wider economy; and South Africa, where we expect energy shortages to begin to ease. Most importantly, we are assuming that the fragile trade truce between the US and China will continue to hold ahead of next November's all-important US general election. Destabilising social unrest is set to continue in 2020 All of these forecasts are subject to risks. In particular, we expect the social unrest seen across the world in 2019 to continue in 2020, challenging both policymakers and business models. In 2019 major protests have been witnessed in countries on every continent—Chile, Bolivia, Colombia, Iraq, Lebanon, Iran and Hong Kong, among others. In some cases protests have led to the removal of a country's leader, such as in Bolivia and Iraq. Others, meanwhile, have either led to disruptions to businesses, such as in Hong Kong, or to changes in policy priorities to address protesters' concerns, such as in Chile. The change in Bolivia's government has led to a completely different approach to that country's foreign policy, which now focuses on relations with the US rather than those with Venezuela and Cuba. Jair Bolsonaro, Brazil's president, recently paused an ambitious reform of the public sector out of fear of a social backlash, thus bringing to a halt the progress that had been made following the reforms to Brazil's pension system. This contagion effect is likely to remain a threat throughout 2020 as social media enables disquiet to spread quickly across borders. Although there is no single, unifying reason to link these protests, generally social unrest has been driven by citizens feeling either politically or economically disenfranchised. Further bouts of unrest are therefore likely in 2020 as the world faces a weakened economic outlook, geopolitical tensions and political dysfunction. US-China relations will remain central to geopolitical risk Policymakers and businesses should also prepare for further volatility in 2020, emanating from the evolving US-China trade war. We continue to expect the two countries to agree on a phase-one trade deal in December 2019, and that the US therefore will not move forward in mid-December with its threatened tariffs on the remainder of finished Chinese-manufactured consumer goods not yet targeted by US duties. When this initial agreement is finalised, it is likely to include Chinese purchases of US agricultural products, the strengthening of China's intellectual property framework and liberalisation of its financial sector. However, there is a high risk that any agreement will be delayed again. Even in this instance, we believe that it is in the US government's interest to delay any tariff increases, which would be unpopular and politically risky in an election year, but a breakdown in negotiations cannot be ruled out. Despite any progress on the tariff-related trade war, US-China relations will be fractious in 2020 and are likely to deteriorate further in 2021-24. The US Congress passed the Hong Kong Human Rights and Democracy Act in November, and the Uighur Act is likely to pass before end-2019, much to the chagrin of China, which views these areas as purely domestic issues. Furthermore, there are deeper structural issues that will not be addressed in the phase-one trade deal. China's industrial policies and market access issues, exacerbated by the strategic competition between the two countries as they seek global technological dominance, will remain controversial. The fundamental nature of this dispute, combined with China's lack of willingness to concede in these areas, will translate into increasingly strained commercial ties between the two countries. Over the longer term, international economic relations will in any case continue to be reshaped by the US- China rivalry, resulting in further decoupling between the world's two largest economies. Positive growth surprises could result as governments loosen the fiscal reins

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47 Turkey 36 The balance of risks to the global growth outlook therefore remains tilted to the downside. However, there may be unexpected events in 2020 that will provide a fillip to global growth. The most significant, but also perhaps the least likely, would be a resolution, on all fronts, to the US- China trade war. Growth could surprise in the Middle East if the current thawing of tensions in the Gulf Co-operation Council leads to an immediate end to the boycott that has split the region. In mid-2017 Saudi Arabia, the UAE, Bahrain and Egypt imposed a boycott on Qatar on the grounds of the country's support for terrorism and closeness to Iran—imposing an onerous list of as yet unmet demands for policy change. Finally, synchronised fiscal stimulus in the EU would be a game-changer for the economic outlook of these countries. Germany continues to be the main obstacle to this scenario: although pressure has been mounting on the German government to relax its strict no-deficit rule, we do not expect a change of stance. If this were to eventuate, however, it could result in stronger global growth and a more rapid rise in global interest rates than financial markets have currently priced in.

World economy: Forecast summary 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 Real GDP growth (%) World (PPPa exchange rates) 3.4 3.3 3.8 3.5 2.8 3.1 3.4 3.6 3.4 3.5 World (market exchange rates) 2.8 2.5 3.2 2.9 2.3 2.4 2.8 2.9 2.8 2.9 US 2.9 1.6 2.4 2.9 2.3 1.7 1.8 2.0 1.8 2.2 Euro area 2.0 1.9 2.7 1.9 1.2 1.2 1.6 1.6 1.6 1.7 Europe 2.0 1.9 2.8 2.1 1.3 1.6 1.9 1.9 1.8 2.0 China 6.9 6.7 6.8 6.6 6.1 5.9 5.7 5.5 5.0 4.7 Asia and Australasia 4.5 4.5 4.9 4.5 4.0 4.0 4.2 4.3 4.0 3.9 Latin Americab 0.1 -0.3 1.8 1.6 0.6 1.0 2.4 2.6 2.6 2.6 Middle East & Africa 2.3 4.8 1.5 1.2 0.8 2.1 2.9 3.1 3.3 3.3 Sub-Saharan Africa 2.7 0.8 2.3 2.4 2.0 2.4 3.4 3.9 4.3 4.5 World inflation (%; av)b 3.0 3.1 3.2 3.4 3.5 3.4 3.3 3.3 3.1 3.1 World trade growth (%) 2.2 2.1 5.8 3.7 1.5 2.3 3.6 3.7 3.7 3.8 Commodities Oil (US$/barrel; Brent) 52.4 44.0 54.4 71.1 64.0 63.0 67.0 71.0 73.8 71.0 Industrial raw materials (US$; % change) -15.2 -2.2 20.2 2.2 -8.7 0.6 3.9 2.7 0.8 1.1 Food, feedstuffs & beverages (US$; % -18.4 -3.5 -0.9 1.5 -4.9 0.8 3.8 1.0 0.9 3.6 change) Exchange rates (av) ¥:US$ 121.0 108.8 112.1 110.4 108.5 106.0 104.7 100.9 97.6 95.4 US$:€ 1.11 1.11 1.13 1.18 1.12 1.13 1.16 1.21 1.24 1.24 a Purchasing power parity. b Excludes Venezuela. Source: The Economist Intelligence Unit.

Economic recovery to continue in 2020 January 10, 2020 In 2019 macroeconomic indicators improved gradually after an economic recession in the second half of 2018. We expect the recovery to continue into 2020 and for full-year real GDP to grow by 3.8% (below the 5% forecast by the government). Risks to the outlook include the overhang of corporate debt and non-performing loans, an oversupplied housing market, geopolitical tensions and excessively fast reductions in interest rates. The government budget deficit will remain broadly unchanged in 2020 from 2019 at about 3% of GDP. A law published in December 2019 introduced a number of new taxes. However, lower-than-expected real GDP growth could still undermine tax revenue targets even if the government avoids stimulants. Concerns about the low level of investment, lack of reform, unpredictable foreign policies, the government's exclusive focus on growth, fiscal transparency issues and pressures on state banks and the central bank are likely to persist into 2021.

Country Report January 2020 www.eiu.com © Economist Intelligence Unit Limited 2020

48 Turkey 37 Real GDP growth slowed to 2.8% in 2018 and an estimated 0.1% in 2019 after the lira crashed in the second half of 2018. The currency depreciation caused a surge in inflation, higher interest rates, and a decline in domestic demand. A loose and unpredictable economic policy, a more confrontational foreign policy stance and rising interest rates in advanced economies caused the depreciation. The malaise spread from the economic to the political sphere, with the ruling Justice and Development Party (AKP) suffering notable losses at the local government elections in March and June 2019. Over the course of 2019, macroeconomic indicators showed gradual signs of improvement. Consumer price inflation ended 2019 at just below 12%, compared to a peak of 25.2% in October 2018 and 16.6% in July. Real GDP expanded by 0.9% year on year in the third quarter of 2019 after three successive quarters of yearly declines. In the second half of 2019, the Central Bank of Turkey reduced its main policy rate by 1,200 basis points from 24% to 12%. Despite this positive direction, the economy remains weak. The housing market is oversupplied, gross public and private foreign debt remains high (62% of GDP in mid-2019), non-performing loans (NPLs) have risen to above 5% of total loans as of November and seasonally adjusted unemployment came down only slightly to 13.9% in September from a peak of 14.2% in July. Economic growth to pick up in 2020 In 2020 we expect real GDP growth to pick up to 3.8%. Private consumption will grow robustly owing to rising employment and wages (the government approved a 15% increase of the minimum wage from January 1st), alongside lower inflation and interest rates. Government consumption will continue to support growth, albeit at a more limited level. As the overall economic picture improves and financing costs drop, we expect investment to recover gradually. However, excess capacity—particularly in construction—will limit the rate of investment growth. A still relatively weak currency by historical standards should continue to support exports in the face of subdued global demand. Combined with relatively low oil prices it should also limit the resurgence of the traditional current-account deficit. We forecast a current-account deficit of 1.2% of GDP in 2020 after a marginal surplus in 2019. The limited deficit and accommodative monetary policy stances in advanced economies will limit the depreciation of the lira against the US dollar. The economic outlook in 2020 is not without risks. Geopolitical tensions have been a key driver of lira volatility in 2019 and they will continue to present challenges to currency stability in 2020. In the final weeks of 2019 the lira weakened further against the dollar owing to renewed tensions over potential US sanctions on Turkey for the latter's purchase of a Russian missile defence system. Mr Erdogan threatened to retaliate to any sanctions by closing a number of military bases in Turkey used by the US Air Force and NATO. Discord over the missile defence system will continue in 2020 as Turkey plans to activate the system in the first months of the year. Other sources of tensions, such as the case against a Turkish state bank, Halkbank, will add to currency risks. On the domestic front, Mr Erdogan's obsession with reducing interest rates, which led him to sack the central bank governor in June and excessively fast cuts to the policy rate could endanger the stability of the lira and consequently inflation. Fiscal policy will remain accommodative The central government budget deficit for 2019 is likely to come in at around 3% of GDP, compared with 2% in 2018. However, it would have been around 4% of GDP had the government not transferred the central bank's accumulated reserve funds to the Treasury and record them as budget revenue. Although the government is on the look­out for similar windfalls—reportedly, it has its eye on the central bank's valuation account—its reputation for fiscal prudence has been damaged and the space for it to go on stimulating economic activity through ad hoc measures such as temporary tax cuts, subsidised lending or accelerated spending has narrowed. The government is aiming to keep the budget deficit for 2020 down to 2.9% of GDP. As part of these efforts, a law published in December introduces new taxes on digital commerce, overnight accommodation services and high-end real estate, as well as a new top personal income tax rate of 40%. However, lower than expected GDP growth (the government forecasts growth of 5%) could still undermine tax revenue targets, even if the government avoids stimulus. The general government debt stock remains quite low by international standards, at 32.2% of GDP as of June 2019, but contingent liabilities due to public-private partnership schemes, gaps in fiscal

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49 Turkey 38 transparency, including those caused by the establishment of a national wealth fund, potential losses at state banks, and high corporate debt and NPLs are non-negligible risks. The economic recession has built up financial weaknesses The lira crash and subsequent recession left many companies struggling to pay their debts to banks and seeking to restructure them. Despite legal and regulatory changes designed to facilitate this process, the problem continues. Private non-financial companies owed US$163.4bn to foreign lenders as of mid-2019, accounting for 36.6% of Turkey's gross foreign debt. They are also indebted to the domestic banks in both lira and foreign currency. Their net short foreign-exchange positions totalled US$178bn as of September 2019, according to the Central Bank of Turkey— down from a pre-crisis peak of US$222.6bn in March 2018. In April 2019 the treasury and finance minister, Berat Albayrak, the president's son-in-law, announced plans for new funds to take over the debts of troubled energy and construction companies. However, these have not been forthcoming. In September the Banking Regulation and Supervision Authority (BRSA) instructed banks to treat TL46bn (about US$8bn) worth of loans to the energy sector as NPLs. The NPL/total credit ratio continues to rise, reaching 5.15% in October, according to the BRSA, compared with less than 3% in the early months of 2018. This situation obliges the banks to set aside additional provisions, reducing the amounts available to lend. Meanwhile, indebted companies may barely be able to maintain their operations, let alone undertake new investments.

Country Report January 2020 www.eiu.com © Economist Intelligence Unit Limited 2020

50 1/17/2020 Turkey profile - Timeline - BBC News

Turkey profile - Timeline

24 June 2019

A chronology of key events:

Ottoman Empire

1453 - Sultan Mehmed II captures Constantinople, ending the Byzantine Empire and consolidating Ottoman Empire in Asia Minor and Balkans.

15th-16th centuries - Expansion into Asia and Africa.

1683 - Ottoman advance into Europe halted at Battle of Vienna. Long decline begins.

19th century - Efforts at political and economic modernisation of Empire largely founder.

1908 - Young Turk Revolution establishes constitutional rule, but degenerates into military dictatorship during First World War, where Ottoman Empire fights in alliance with Germany and Austria-Hungary.

1918-22 - Partition of defeated Ottoman Empire leads to eventual triumph of Turkish National Movement in war of independence against foreign occupation and rule of Sultan.

Modern Turkey

1923 - Grand National Assembly declares Turkey a republic and Kemal Ataturk president.

1928 - Turkey becomes secular: clause retaining Islam as state religion removed from constitution.

1938 - President Ataturk dies, succeeded by Ismet Inonu.

1945 - Neutral for most of World War II, Turkey declares war on Germany and Japan, but does not take part in combat. Joins United Nations.

1950 - First free elections won by opposition Democratic Party.

Military coups

1952 - Turkey abandons Ataturk's neutralist policy and joins Nato.

1960 - Army coup against ruling Democratic Party.

1963 - Association agreement signed with European Economic Community (EEC).

1974 - Turkish troops invade northern Cyprus.

1980 - Military coup follows political deadlock and civil unrest. Imposition of martial law.

1983 - General election won by Turgut Ozal's Motherland Party. 51 https://www.bbc.com/news/world-europe-17994865 1/5 1/17/2020 Turkey profile - Timeline - BBC News Kurdish war

1984 - Kurdistan Workers' Party (PKK) launches separatist guerrilla war in southeast.

1987 - Turkey applies for full EEC membership.

1992 - 20,000 Turkish troops enter Kurdish safe havens in Iraq in anti-PKK operation.

Rise of political Islam

1996 - Centre-right coalition falls. Welfare Party leader Necmettin Erbakan heads first pro-Islamic government since 1922.

1997 - Coalition resigns after campaign led by the military.

1998 - Welfare Party banned.

1999 - PKK leader Abdullah Ocalan captured in Kenya.

2001 June - Constitutional Court bans opposition pro-Islamic Virtue Party, saying it had become focus of anti- secular activities.

2002 January - Turkish men are no longer regarded in law as head of the family. The move gives women full legal equality with men, 66 years after women's rights were put on the statute books.

Islamist party victorious

2002 November - Islamist-based Justice and Development Party (AK) wins landslide election victory. Party promises to stick to secular principles of constitution.

2003 March - AK Party leader Recep Tayyip Erdogan wins seat in parliament. Within days Abdullah Gul resigns as prime minister and Erdogan takes over.

Parliament decides not to allow deployment of US forces ahead of war in Iraq but allows US use of Turkish air space. It authorises dispatch of Turkish forces into Kurdish areas of northern Iraq.

2003 June-July - Eyeing future EU membership, parliament passes laws easing restrictions on freedom of speech, Kurdish language rights, and on reducing political role of military.

Istanbul attacks

2003 November - 25 people are killed and more than 200 injured when two car bombs explode near Istanbul's main synagogue. Days later two co-ordinated suicide bombings at the British consulate and a British bank in the city kill 28 people.

2005 January - New lira currency introduced as six zeroes are stripped from old lira, ending an era in which banknotes were denominated in millions.

2006 30 September - Kurdish separatist group, the PKK, declares a unilateral ceasefire in operations against the military. 52 https://www.bbc.com/news/world-europe-17994865 2/5 1/17/2020 Turkey profile - Timeline - BBC News 2006 December - EU partially freezes Turkey's membership talks because of Ankara's failure to open its ports and airports to Cypriot traffic.

2007 January - Journalist and Armenian community leader Hrant Dink is assassinated. The murder provokes outrage in Turkey and Armenia.

Secularist protests

2007 April - Tens of thousands of supporters of secularism rally in Ankara, aiming to pressure Prime Minister Erdogan not to run in presidential elections because of his Islamist background.

2007 July - AK Party wins parliamentary elections. Abdullah Gul elected president the following month.

2007 October - Voters in a referendum back plans to have future presidents elected by the people instead of by parliament.

2008 February - Thousands protest at plans to allow women to wear the Islamic headscarf to university.

2009 October - The governments of Turkey and Armenia agree to normalise relations at a meeting in Switzerland.

2010 May - Relations with Israel come under severe strain after nine Turkish activists are killed in an Israeli commando raid on an aid flotilla attempting to reach Gaza.

2013 May-June - Mass anti-government protests spread to several cities, sparked by plans to develop one of Istanbul's few green spaces. The police respond with violence, and two protestors die.

2013 December - Government sacks numerous police chiefs over arrests of pro-government public figures on corruption charges. Observers see this as part of power struggle with former AK Party ally and influential US-based Muslim cleric Fethullah Gulen.

Erdogan presidency

2014 August - Prime Minister Erdogan wins the first direct popular election for president.

2015 March - The "Sledgehammer" coup plot trial collapses when a court clears 236 military officers accused of involvement in an alleged conspiracy to remove former Prime Minister Erdogan from power in 2003.

2015 June - The pro-Kurdish leftwing People's Democratic Party (HDP) enters parliament at elections, depriving the governing AK party of its majority and scuppering plans for a referendum on executive powers for President Erdogan.

Syria conflict

53 https://www.bbc.com/news/world-europe-17994865 3/5 1/17/2020 Turkey profile - Timeline - BBC News

AFP

2015 November - Governing AK party regains parliamentary majority in snap elections, but falls short of numbers needed for referendum to boost President Erdogan's powers.

Turkey shoots down a Russian military jet on Syria bombing mission. Russia, Turkey's second-largest trading partner, imposes economic sanctions.

European Union strikes a deal whereby Turkey restricts flow of migrants into Europe, in return for €3bn ($3.17bn) and concessions on stalled EU accession talks.

2016 February - Bomb attack on military convoy in the capital Ankara kills at least 38 people. A hard-line breakaway PKK faction - the Kurdistan Freedom Hawks (TAK) - claims responsibility.

2016 June - A gun and suicide attack on Istanbul's Ataturk airport kills 42 people, including 13 foreign nationals. Turkish authorities believe the attack bears the hallmarks of Islamic State.

Coup attempt

2016 July - The authorities detain thousands of soldiers and judges on suspicion of involvement in a coup attempt that President Erdogan says was inspired by his exiled opponent Fethullah Gulen.

The government also shuts down dozens of media outlets - including 16 TV channels - during a continuing crackdown in the wake of the failed coup attempt.

2017 January - Uzbek gunman kills 39 people celebrating New Year at the Reina nightclub in Istanbul. Islamic State group says it was behind the attack.

2017 April - President Erdogan narrowly wins referendum to extend his powers. Opposition launches appeal against result.

2018 January - The Turkish military launches its ''Olive Branch'' land and air operation in north-western Syria, seizing large areas from Kurdish control, including the town of Afrin.

54 https://www.bbc.com/news/world-europe-17994865 4/5 1/17/2020 Turkey profile - Timeline - BBC News 2019 June - President Erdogan suffers setback as opposition CHP party wins the mayoral election in his home city of Istanbul by a comfortable margin. He had insisted on a re-run of the poll when the CHP won narrowly in March.

2019 October - US withdraws troops from northern Syria, prompting Turkey to attack US Kurdish allies in the area.

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56 ARMED FORCES Page 1 of 5

Turkey > Armed Forces

Date Posted: 09-Dec-2019

Publication: Jane's Sentinel Security Assessment - Eastern Mediterranean

Contents Military capabilities | Threat environment | Doctrine and strategy | Military capabilities assessment | Joint forces interoperability | Tri-service interoperability | Multinational interoperability | Defence structure | Command and control |

Military capabilities Last updated: 9-Dec-2019

Total strength Army Air force Navy

Active personnel 1 401,000 304,000 53,000 44,000

Reserves n/a n/a n/a n/a

1. Not included are approximately 50,000 civilians employed by various military commands.

• The Turkish Armed Forces (TAF) collectively form the second-largest military force in NATO and are undertaking a range of procurement programmes to ensure that the sizeable force is matched with sufficient capability. However, despite Turkey’s desire to become a significant military actor capable of regional sustained force projection, it remains principally occupied with countering separatist and insurgent forces along its border regions. Key procurement initiatives have done little to improve the success of the COIN campaign that Turkey is waging, despite previous extensive experience combatting Kurdistan Workers' Party (PKK) militants since the 1990s. • As the Turkish government has turned away from Europe politically and economically, it has at the same time focused on its ‘near abroad’ in the Eastern Mediterranean and the Middle East. Although constituting only localised deployments, limited military action in northern Syria represents a significant step in building and refining Turkish approaches to power projection and sustainment. Although the armed forces have often experienced heavier-than-expected losses of personnel and equipment in these efforts, it has largely achieved its operational objectives of denying Kurdish forces contiguous territory along its southern border with Syria through operations ‘Euphrates Shield’ (2016–17) and its follow-on operation ‘Olive Branch’ (2018). • The TAF initiated Project TSK-2033 in 2014 to provide strategic guidance for future force modernisation efforts, taking a medium-term view of Turkey’s defence requirements. However, since the launch of the effort in 2014, the strategic balance of the Middle East and Eastern Mediterranean has shifted significantly, challenging many of the assumptions originally present in the strategic guidance document.

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Since its release, Turkey has embarked upon an extensive modernisation effort while expanding its strategic reach to play a larger role in the Eastern Mediterranean and Gulf regions. • The focus of most procurement programmes has been to steadily increase its deployable combat power, underpinned by expanding Turkey’s strategic and tactical lift capabilities. Equipment such as EW, additional airborne early warning and control (AEW&C) and C4ISR aircraft; air defence assets; and radar will likely be given priority in the near term as Turkey seeks to create more secure borders and more operationally capable deployable forces. • Turkish defence procurement, as with most emerging defence buyers, is driven by more than core strategic needs. Defence procurement is used by Turkey as a tool for industrial development and while immediate needs may be fulfilled as outright purchases, longer-term procurement will be driven with this in mind. Acquisitions are thus aimed to ensure that the government meets its target of defence self- sufficiency by 2023. To achieve this, Turkey has strengthened industrial defence co-operation ties with not only traditional suppliers in the West, but also with states adept at defence manufacturing and innovation (such as Ukraine and Singapore) that offer manufacturing and industrial partnership arrangements to advance its indigenous defence industry. The development of Turkey's presence in international defence and security markets has been a long-standing objective of Turkish governments. Turkey's national offset programme has been partly geared towards the facilitation of foreign trade while a series of strategic plans have been put in place by the then-Turkish undersecretariat for defence industries (SSM) to increase defence and security exports.

Threat environment Last updated: 12-Aug-2019

Turkey’s recognised threats are codified and defined in the National Security Policy Document (Milli Güvenlik Siyaseti Belgesi: MGSB) and approved by the National Security Council (Milli Güvenlik Kurulu: MGK).

Turkey finds itself in an increasingly insecure environment, with threats to the state proliferating rather than subsiding. Perhaps some of the state’s security concerns have been of its own making – being slow to react to evolving situations and often being wrong-footed by forces more adept at recognising and exploiting tactical, operational, and political advantages.

The PKK and associated Kurdish militant forces have been recognised as the most significant threat to the Turkish state since the 1990s, supplanting Greece as the primary threat to security.

Although Greece remains on the periphery of security concerns, the internal strife in Syria has given rise to a host of new threats along Turkey’s southern border. Islamic militant activity followed by Syrian Kurds capture and consolidation of territory have prompted Turkish military action within Syrian territory, while an increasingly influential Russian presence in the region has guaranteed the continuation of the Assad regime.

Iran’s military modernisation efforts continue to be a destabilising force in the wider Middle East while Turkey’s support of Qatar in a deepening rift with Saudi Arabia will only further destabilise the already volatile Persian Gulf region.

Doctrine and strategy Last updated: 12-Aug-2019

Turkey’s strategic priorities have evolved over time and with it, its guiding doctrinal principles. The disintegration of the Soviet Union in the early 1990s meant that Turkey no longer had to focus primarily on its response to sudden attack as a governing principle of its strategy. Historic animosity with Greece remained, however, driving defence planning and procurement priorities in the years following the cessation of the Cold War. Issues

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around Kurdish separatism and terror attacks induced the TSK to play a more active role in the internal security of the state.

From these threats, Turkey reframed military strategy in terms of deterrence, superior mobility, forward defence, endurance, and rapid intervention capability in times of crisis. Objectives involved the reorganisation of the TSK, with the land forces transitioning from a divisional structure to a more flexible brigade-based structure, with an emphasis on mobility and rapid reaction. Although Turkish military doctrine continues to be based on territorial defence rather than force projection, acquisition of air and naval platforms optimised for out- of-area deployment demonstrates Turkey’s desire to become a strategic regional actor.

Military capabilities assessment Last updated: 20-Nov-2019

1749074

Turkey Capability Assessment Matrix (IHSMarkit)

• Turkey must confront a range of evolving security challenges ranging from internal security operations against separatist groups and its ongoing limited military operations in northern Syria. Although many key platforms in the Turkish inventory are trending towards obsolesce by most NATO states’ standards, Jane’s assesses that the state largely possesses capabilities adequate to address most security challenges confronting it. • The Turkish fighter fleet is comprised of F-16s in the latter half of their service lives and upgraded F-4s. The capabilities possessed by both aircraft are considered adequate to fulfil Turkey’s immediate requirements, able to defend Turkish airspace against most of its neighbours as well as providing air-to- ground support when required. Turkey had planned on renewing its fighter fleet through procurement of F-35A Lightning II 5th generation aircraft, but US opposition to Turkey’s procurement and installation of Russia’s S-400 has seen the deal for up to 100 aircraft indefinitely suspended and logistics support networks established in the state being relocated by March 2020. The absence of the F-35A leaves a fairly significant gap in Turkey’s future air fleet renewal plans, with Russia emerging as a likely contender to fill that gap. Turkey’s unmanned ISR holdings were originally limited to Israeli-manufactured tactical systems, although the indigenously produced Anka has begun to enter service in significant numbers to increase Turkey’s long-endurance unmanned aircraft system (UAS) surveillance and light strike capabilities. The backbone of Turkey’s logistics fleet remains the C-130 Hercules, although the oldest are transitioning out of service with the introduction of the A400M. • Turkey’s significant armour and artillery inventory has undergone multiple upgrade programmes to extend service lives and increase capability. A proportion of Turkey’s Leopard 2 and M60 fleets have been upgraded to increase their survivability as a result from combat experience gained in 2016–17’s Operation ‘Euphrates Shield’ and 2018’s Operation ‘Olive Branch’. Augmented with Turkey’s training regimen, the land forces can conduct complex operations in vicinity of their border areas, as well as the

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conduct limited large offensive operations. Next-generation T-155 NG self-propelled howitzers (SPHs) and future deliveries of Altay main battle tanks (MBTs) will allow for more robust interconnectivity of direct and indirect fire systems through linked C2 systems, resulting in smaller but more capable manoeuvre. Deliveries of T-129 attack helicopters are gradually replacing the venerable AH-1 Cobra, while procurement of T-70 Black Hawk utility helicopters will replace ageing AB205 and UH-1 aircraft, improving readiness and availability of rotary-wing support elements. • In the naval domain, several of Turkey’s principal combatants and sub-surface forces have undergone modernisation efforts to meet Turkey’s evolving requirements. Turkey’s naval forces remain some of the most capable in the region and are supported by a large, if ageing, logistics support fleet. Amphibious capabilities are judged to be largely adequate but will be expanded significantly in the medium-term with additional amphibious attack craft. An amphibious transport dock (LPD) is due to enter service by the mid-2020s.

Joint forces interoperability Last updated: 12-Aug-2019 Tri-service interoperability Throughout the Cold War, Turkey’s individual services’ well-defined roles and responsibilities largely precluded extensive interoperability between forces. However, as the threats to Turkey diffused to become both more complex and multifaceted, Turkey’s forces found it increasingly necessary to increase inter-service interoperability to improve effectiveness. The requirement for close air support beyond what could be provided by the army’s rotary-wing assets led to closer co-ordination with the air force. The requirement to better enforce Turkey’s borders have allowed Turkey’s navy and air force to develop mechanisms to jointly monitor air and maritime environments. Multinational interoperability As a member of NATO, Turkey has remained committed to the concept of a multinational force (with a mission to provide collective security, deter potential aggressors, and share risks in a number of operational theatres). According to the TSK’s stated defence policy, Turkey’s military strategy is based on “dialogue and co-operation, deterrence, contribution to crisis management and conflict prevention, and collective security under the NATO umbrella”. However, Turkey’s foreign policy has caused it to come at increasing odds with NATO allies, focusing on advancing its status in the Eastern Mediterranean and Gulf regions rather than increasing interoperability with the European states of NATO. The acquisition of the S-400 air defence system has been the most marked departure from NATO standards and practices, as the system is incompatible with the collective air monitoring and defence system established within other NATO states.

Defence structure Last updated: 12-Aug-2019

The General Staff is the principle command structure of the TAF, with the individual services (army, air force, and navy) under the direction of the Chief of the General Staff.

The Gendarmerie General Command and Coast Guard Command are under the command of the Ministry of Interior Affairs during peacetime. In times of war, the forces would be subsumed under the command of the General Staff and under operational control of the Land Forces Command and Naval Forces Command.

Command and control Last updated: 12-Aug-2019

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Minister of National Defence: General Hulusi Akar

Chief of General Staff: General Yaşar Güler

Commander of the Land Forces: General Ümit Dündar

Commander of the Air Force: General Hasan Küçükakyüz

Commander of the Naval Forces: Admiral Adnan Özbal

Until the July 2016 coup attempt, the Chief of the General Staff reported directly to the prime minister in peacetime, charged with the overall C2 of the armed forces and ensuring operational readiness. However, after 7 of 10 members of the senior General Staff were purged following the coup attempt, the General Staff was subsumed under the Ministry of National Defence, significantly curtailing the semi‐autonomous state that it had enjoyed for decades.

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62 Norway

Subject Page Ambassador Kenneth J. Braithwaite ...... 65 US Relations with Norway ...... 67 Economist Intelligence Unit Country Report ...... 71 BBC Country Profile Timeline ...... 103 Jane's Armed Forces ...... 109 63 This page intentionally blank

64 12/28/2019 Ambassador Kenneth J. Braithwaite | U.S. Embassy in Norway

U.S. Embassy in Norway

Ambassador Kenneth J. Braithwaite Rear Admiral Kenneth J. Braithwaite, United States Navy (Retired) was nominated by the President of the United States to serve as the 31st U.S. Ambassador to the Kingdom of Norway. On Thursday, February 8, 2018, Ambassador Kenneth J. Braithwaite presented his credentials to Norway’s Head of State, His Majesty King Harald V, and was thereby formally accredited as U.S. Ambassador to the Kingdom of Norway.

Ambassador Braithwaite recently concluded his service as the Regional Chief Executive of VHA/Vizient MidAtlantic and New England, LLC a member-owned hospital group purchasing organization serving hospitals and health systems throughout the greater eastern seaboard. He joined VHA in November of 2011 and led the merger of VHA East Coast, LLC with VHA Pennsylvania, LLC. In 2014, he led the merger with VHA Empire-Metro, LLC creating the greater VHA Mid-Atlantic Region. He is most proud of the fact that during his tenure this division went from last to rst in overall sales revenue as well as both member satisfaction and employee satisfaction among all divisions of the company.

Ambassador Braithwaite is a 1984 graduate of the United States Naval Academy, Annapolis, Maryland and the rst of his class selected for ag rank after only 21 years of military service. Qualied as a Naval Aviator, he ew anti-submarine warfare (ASW) missions tracking Soviet submarines throughout the Northern and Western Pacic Ocean regions as part of Patrol Squadron 17 and Patrol Wing 2. Other assignments during his military career included serving as a Special Assistant in the Navy’s Oce of Legislative Affairs, U.S. Senate Liaison Oce Capitol Hill; Director of Public Affairs aboard the aircraft carrier USS America (CV-66) with additional duty to the Commander, Carrier Group Two and Commander, Striking Force Sixth Fleet where he operated above the Arctic Circle; Chief of Public Affairs, to the Commander of Naval Base Philadelphia during the White House Base Closure Commission initiative; Commanding Ocer, Fleet Combat Camera Atlantic (Reserve) deploying with this command as part of the initial invasion into Iraq in 2003; Director, Joint Public Affairs Support Expeditionary Element (Reserve), U.S. Joint Forces Command where he deployed to Pakistan and became Chief of Strategic Communications to the U.S. Ambassador, Islamabad with additional duty to the Commander, Combined Forces Command, Afghanistan; and nally as Vice Chief of Information for the United States Navy.

During periods of inactive service, Ambassador Braithwaite served as Manager of Operations, Atlantic Richeld Chemical Inc.; Executive Director & Senior Advisor to U.S. Senator Arlen Specter, (R-PA); Vice President of Government Affairs, for Ascension Health the largest healthcare system in the United States 65 https://no.usembassy.gov/our-relationship/our-ambassador/ 1/2 12/28/2019 Ambassador Kenneth J. Braithwaite | U.S. Embassy in Norway and Executive Director, Delaware Valley Healthcare Council, Philadelphia. He received his graduate degree from the University of Pennsylvania, Fels School of Government. Ambassador Braithwaite has also completed additional studies at the Naval War College in Newport, Rhode Island as well as courses at the Air Command and Staff College, Maxwell Air Force Base, Montgomery, Alabama. Ambassador Braithwaite has been awarded the Legion of Merit, the Defense Meritorious Service Medal, Meritorious Service Medal, Navy Commendation Medal, Navy Achievement Medal, and the Combat Action Ribbon. However, he is most proud of having been part of teams that received the Navy Unit Commendation, Joint Meritorious Unit Commendation and the Humanitarian Service Medal.

An avid sailor, sportsman and amateur historian, Ambassador Braithwaite is married to the former Melissa Losito of Marlton, New Jersey. They have two children, Grace and Harrison and before moving to Norway, they resided in Chadds Ford, Pennsylvania at “Twin Magnolias” a home built in 1741 and used by British General Lord Cornwallis as his staff quarters during the Battle of Brandywine in 1777.

This is the ocial website of the U.S. Embassy in Norway. External links to other Internet sites should not be construed as an endorsement of the views or privacy policies contained therein.

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More information about Norway is available on the Norway Page and from other Department of State publications and other sources listed at the end of this fact sheet.

U.S.-NORWAY RELATIONS

The United States established diplomatic relations with Norway in 1905, following Norway’s separation from its union with Sweden. The United States and Norway enjoy a long tradition of friendly relations based on democratic values and mutual respect. The two countries work closely together on a wide range of issues that are of importance to both nations and to the rest of the world. Norway is a co-founder and steadfast strategic Ally in the North Atlantic Treaty Organization (NATO). It hosts and participates in NATO exercises and in operations with Allies and Partners, and is a contributor to the NATO-led Resolute Support Mission in Afghanistan, which provides training, advice and support to the Afghan National Defense and Security Forces. Norway is also an active member of the Global Coalition to Defeat ISIS, and has deployed trainers

67 https://www.state.gov/u-s-relations-with-norway/ 1/5 1/17/2020 U.S. Relations With Norway - United States Department of State to Iraq in the support of Operation Inherent Resolve. Since January 2017, Norway has hosted a limited, rotational presence of U.S. Marines for cold weather exercises and training.

Norway is deeply committed to the provision of development and humanitarian assistance overseas, as highlighted by a generous foreign aid budget of around $4.3 billion in 2018, which constitutes nearly 1% of the country’s GNI. In addition, Norway actively promotes universal human rights and economic development, and seeks the peaceful resolution of disputes around the globe.

Norway takes a keen interest in addressing the problems posed by climate change, including a focus on clean energy technology, expanding access to renewable energy, forest protection, and increasing agricultural productivity. Norway is a strong advocate and leader for economic, energy, and environmental cooperation in the Arctic.

There are strong historical people-to-people ties between the United States and Norway, with nearly five million Americans claiming Norwegian ancestry, almost equal to Norway’s own population. Both countries are working to facilitate even greater educational exchange opportunities.

U.S. Assistance to Norway

The United States provides no development assistance to Norway.

Bilateral Economic Relations

The United States and Norway have a dynamic economic partnership that is creating jobs, driving the development of safe and secure energy sources, and fostering innovation. As the world’s second-largest exporter of natural gas and eleventh-largest exporter of oil, Norway plays an important stabilizing role in energy markets and energy security. Many U.S. companies participate in Norway’s petroleum sector, and vice versa. The United States and Norway are also committed to increasing access to modern energy services for the 1.4 billion people on the planet today who do not have any access to energy.

U.S. exports to Norway include aircraft, mineral fuels, vehicles, machinery, and optic and medical instruments. U.S. imports from Norway include mineral fuels, fish and seafood, machinery, and optical and medical instruments. Reported U.S. direct investment in Norway is led by the mining 68 https://www.state.gov/u-s-relations-with-norway/ 2/5 1/17/2020 U.S. Relations With Norway - United States Department of State and manufacturing sectors. Software and IT services, coal, oil and natural gas, and metals, account for the top three sectors in Norway’s reported direct investment in the United States.

Norway’s Membership in International Organizations and Fora

Norway and the United States belong to a number of the same international organizations and fora, including the African Development Bank, Arctic Council, Asian Development Bank, Euro- Atlantic Partnership Council, Inter-American Development Bank, International Monetary Fund, Organization for Economic Cooperation and Development, Organization for Security and Cooperation in Europe, the North Atlantic Treaty Organization (NATO), United Nations, World Bank, and World Trade Organization. Norway also is an observer to the Organization of American States.

Bilateral Representation

The U.S. Ambassador to the Kingdom of Norway is Rear Admiral Kenneth J. Braithwaite, USN (Ret.); other principal embassy officials are listed in the Department’s Key Officers List.

Norway maintains an embassy in the United States at 2900 K Street NW Ste. 500, Washington, DC 20007 (tel. 202-333-6000).

More information about Norway is available from the Department of State and other sources, some of which are listed here:

CIA World Factbook Norway Page U.S. Embassy History of U.S. Relations With Norway U.S. Census Bureau Foreign Trade Statistics Export.gov International Offices Page Travel Information

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70 ______

Country Report

Norway

Generated on January 23rd 2020

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72 Norway

Norway

Summary 2 Briefing sheet

Outlook for 2020-24 4 Political stability 4 Election watch 5 International relations 5 Policy trends 6 Fiscal policy 6 Monetary policy 7 International assumptions 8 Economic growth 8 Inflation 9 Exchange rates 9 External sector 9 Forecast summary 10 Quarterly forecasts

Data and charts 11 Annual data and forecast 12 Quarterly data 12 Monthly data 14 Annual trends charts 15 Quarterly trends charts 16 Monthly trends charts 17 Comparative economic indicators

Summary 17 Basic data 19 Political structure

Recent analysis Politics 22 Forecast updates 24 Analysis Economy 26 Forecast updates

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73 Norway

Briefing sheet Editor: Matthew Rodger Forecast Closing Date: December 15, 2019 Political and economic outlook In January 2019 the Christian Democrats (KrF) joined the Liberals, the Conservatives and the Progress Party (FrP) in government—the first centre­right majority coalition in Norway since the 1980s. The Economist Intelligence Unit expects it to last a full term, to 2021. Tensions between the Liberals and the FrP will remain high over the forecast period (2020-24), but coalition parties made concessions to the KrF to avoid a government collapse. A parliamentary majority of six allows the government to pass legislation swiftly. Norges Bank (the central bank) started to tighten policy in September 2018, after leaving rates unchanged, at a record low of 0.5%, since 2016. The rate is now at 1.5%, and we expect no further hikes in the policy rate as core inflation converges to Norges Bank's 2% target. Real GDP growth fell to 1.5% in 2018, from 2.7% in 2017. Strong import growth has limited the expansion in 2019 to 1%, but we expect the economy to rebound, with growth averaging 2% in 2020-24, driven by momentum in oil sector exports, investment and consumer spending. The oil sector has largely recovered from the 2014 collapse in oil prices, and production will rebound from 2020 onwards. We expect real, petroleum-related investment to increase significantly in 2019, by 6.3%, as development of new fields gathers pace. Average global oil prices will remain broadly stable in 2020 as global demand softens. From 2021 prices will recover as global demand rallies and a lack of new discoveries hinders supply. Changes in the krone will follow events in energy markets. Key indicators 2019a 2020b 2021b 2022b 2023b 2024b Real GDP growth (%) 1.0 1.7 1.9 2.0 2.2 2.1 Consumer price inflation (av; %) 2.2 1.7 2.0 2.0 2.1 2.1 Government balance (% of GDP) 6.5 6.6 7.0 7.6 7.7 7.6 Current-account balance (% of GDP) 5.4 6.1 6.1 6.4 6.7 7.0 Money market rate (av; %) 1.6 1.9 1.9 2.0 2.0 2.1 Unemployment rate (%) 3.7 3.3 3.2 3.1 3.2 2.6 Exchange rate Nkr:US$ (av) 8.79 8.82 8.56 8.16 8.01 7.92 a Economist Intelligence Unit estimates. b Economist Intelligence Unit forecasts.

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74 Norway

Key changes since November 19th The krone remained weak in November, averaging Nkr9.15:US$, owing to still-subdued oil prices. Consequently, we have lowered our estimate for the average krone rate in 2019 to Nkr8.79:US$ from Nkr8.76:US$ previously. Headline inflation in November came to 1.6%, with core inflation (excluding taxes and energy costs) falling to 2%, the Norges Bank (central bank) target. As a result, we expect Norges Bank will not raise the policy rate in 2020, as inflation converges to its 2% target. The month ahead December 16th—Merchandise trade (November): The trade surplus weakened throughout 2019, owing to the buoyancy of the mainland economy, raising import demand, and a steady decline in the oil price, dragging on export receipts. We expect the trade surplus to average US$15.4bn in 2019, before narrowing further in 2020. December 19th—Monetary policy meeting: We expect the monetary policy tightening cycle to be halted until mid-2020 as core inflation gradually subsides and economic growth remains robust. We expect inflation to stabilise around the Norges Bank's 2% target from 2021 onwards. January 10th—Consumer price index (CPI; December): Falling electricity prices have dragged down the headline inflation rate in recent months, to 1.6% in November. High base effects from a year earlier should keep inflation quiescent towards the end of 2019, and into 2020. We estimate inflation at an average of 2.2% in 2019, falling to 1.7% in 2020. Major risks to our forecast Scenarios, Q4 2019 Probability Impact Intensity House prices fall sharply, weighing on growth High Moderate 12 A US-China trade conflict leads to the segmentation of the global trading Moderate High 12 system Parties change the attractive oil-sector tax regime Moderate High 12 Ambitious plans to curtail domestic emissions lead to more aggressive Moderate Moderate 9 legislation for firms Norway is targeted by international terrorists Moderate Moderate 9 Note. Scenarios and scores are taken from our Risk Briefing product. Risk scenarios are potential developments that might substantially change the business operating environment over the coming two years. Risk intensity is a product of probability and impact, on a 25-point scale. Source: The Economist Intelligence Unit.

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75 Norway

Outlook for 2020-24 Political stability The Economist Intelligence Unit expects the current centre-right coalition government to last a full term, to 2021. The four-party coalition consists of the far-right Progress Party (FrP), the centre- right Conservatives and two small centrist parties: the Liberals and the Christian Democrats (KrF). The government has a majority of 87 members of parliament (MPs) in the 169-seat Storting (parliament). Risks to political stability are high, especially given the tensions between the far- right FrP and the centrist parties of the coalition, the Liberals and the KrF. These could lead to the withdrawal of a party from the coalition. However, there is no risk of a snap election, as the constitution prohibits a pre-term dissolution of parliament. Moreover, the current government could continue as a minority administration with support from opposition parties—a common occurrence in Norway's consensual style of politics. Following the September 2017 parliamentary election, the right-wing parties formed the first wholly right-wing majority government since the 1980s. A centre-right majority government was a long- held ambition of Erna Solberg, the prime minister and leader of the Conservatives. The coalition maintained the alliance between the Conservatives and the FrP from the previous minority government of 2013-17, but expanded it to include the Liberals in January 2018 (in exchange for concessions on environmental policy), and the KrF a year later. The KrF had supported the right-wing coalition from the opposition benches in the 2013-17 legislature. However, following the 2017 election, their leadership twice threatened to collapse the right-wing coalition and replace it with an alternative government comprising the centre-left Labour Party and the agrarian Centre Party. Two factors subsequently led to the KrF's inclusion in the four-way coalition government. First, the membership of the KrF was open to collaborating with the government, rejecting motions to support an alternative and approving a proposal to join the coalition in January 2019. Second, the party's new leadership is committed to remaining in the government. The former leader, Knut Arild Hareide, resigned after the membership's vote to join the coalition, and was replaced by Kjell Ingolf Ropstad, who led the negotiations with the ruling parties. This commitment to remain in government by both the party's members and its leadership has increased political stability compared with a year ago. However, risks to the ruling coalition remain, mainly stemming from tensions between the far-right FrP and the centrist Liberals. Poor results in the recent local elections have spurred efforts by both the Liberals and the FrP to secure concessions on various policies to highlight their influence in government (and to revive their electoral fortunes), frequently working at cross- purposes and thereby raising coalition tensions. Relations between the FrP and the KrF, in contrast, have been calmer, as cabinet rows have mostly revolved around environmental policy, which is less of a headline issue for the KrF. The Conservatives have so far managed coalition volatility, but flashpoints for an escalation in tensions include government spending, energy infrastructure, and policies on migration and integration. Nevertheless, political risks in absolute terms remain low, as a snap election is not a constitutional possibility. In addition, were the FrP or the Liberals to exit the coalition, they would still act as external backers for Ms Solberg.

Election watch The next general election will be held in September 2021. The Storting cannot be dissolved before completing a full four-year term, meaning that there is no risk of a snap election. In recent municipal elections for local and regional governments, held on September 9th 2019, the governing parties recorded low levels of support, with the Liberals' share of the vote coming in below the 4% threshold required to enter parliament on a national level. Although the largest parties—Labour, the Conservatives and the FrP—experienced greater losses, the results may worsen tensions between the junior members of the ruling coalition.

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76 Norway

International relations Diplomatically, Norway has been largely untouched by the souring of US-European relations since the election of Donald Trump as US president. This is due to Norway's position within NATO as an important member in the North Atlantic region, and its collaboration with the US in several global institutions such as the Arctic Council. Although Norway frequently runs bilateral trade surpluses with the US, it remains a large export market for major US industries such as agriculture and aerospace. In a visit to the US in January 2018 Ms Solberg announced the purchase of F-35 fighter jets and P-8 maritime patrol aircraft from US suppliers, supporting stronger trade and military relations with the country. Relations with the EU will remain one of the main foreign policy issues, particularly in the light of the UK's vote to leave the bloc. As a member of the European Economic Area, Norway has access to the single market (in exchange for contributions to the EU budget), but must accept relevant EU regulations while having limited influence over them. Nevertheless, the trading outlook remains uncertain. The economic consequences of Mr Trump's protectionist stance remain a risk for Norway's exports to the EU, its largest export market, and (by extension) its own growth. Tariff rises on EU products by the US would slow growth in Norwegian export demand, as a decline in export competitiveness (from the tariffs) would reduce domestic growth in the export-oriented European economy and curtail demand for Norway's exports of energy and machinery.

Policy trends Economic diversification following the 2014 shock to world oil prices is a central theme in government policy. The administration identifies the aluminium industry, the healthcare sector, fish farming and fisheries, and green technology as potential areas for growth. However, we do not expect substantial progress to be made over the forecast period, as despite oil production being based offshore, many mainland industries remain dependent on the sector; the conservative government's fiscal policy only allows limited room for state support to new industries; and diversification has diminished in political salience now that oil prices have recovered. Oil industry investment has rebounded from 2016 lows (mirroring the pick-up in global energy prices), as seen in the development of several large new oilfields and the expanded maintenance of existing fields. Another emerging theme in national policymaking is emissions reduction. Although Norway is a signatory to the Paris Agreement on climate change and has pledged to reduce its emissions by 40% from 1990 levels by 2030, successive governments have made little progress in reducing domestic carbon dioxide emissions. In 2018 domestic emissions were 3.4% higher than their 1990 level, in contrast to trends in the EU, where emissions have decreased by about 20% from 1990 levels. Previous Norwegian governments have funded emissions reduction abroad, rather than domestically, through rainforest conservation or through funding green energy initiatives, and the present centre-right government looks set to continue this policy. However, although we expect the government to not pursue cuts in domestic emissions, the greater focus on carbon emissions in recent years and the emergence of the Greens in the most recent municipal elections pose increasing risks to this consensus. Consequently, it is probable that the government will adopt a more strident environmentalist stance in the coming years.

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77 Norway

Fiscal policy The draft 2020 budget, presented by the government in early October, implies a slightly tighter fiscal policy from 2019, with a deceleration in projected spending growth, alongside faster growth in revenue. Although we expect government spending to rise by 1.2% in 2020, a countervailing rise in government revenue will maintain the government's broadly tight fiscal stance. The government is projecting an improvement in the budget surplus of 0.2 percentage points of GDP from 2019 to 2020, although we only expect the surplus to rise by 0.1 percentage points, to 6.6% of GDP, as the dip in oil prices and production restrains revenue growth compared with government estimates. The 2020 budget complies with the fiscal rule and estimates that withdrawals from the Government Pension Fund Global (GPFG) will total Nkr169.5bn (US$18.5bn), which is about 2.6% of the fund's estimated capital as at October 2019. The government's emphasis on improving competitiveness remains central to its fiscal plans, which include greater investments in transport infrastructure, and more support for education and re-skilling in the workplace. There will also be a higher level of investment in green technology, in line with Norway's emissions targets. We expect the surplus to increase gradually until 2023, mirroring oil price developments, a pick-up in petroleum investment activity and improvements in the labour market.

Monetary policy Norges Bank (the central bank) targets inflation of "close to 2% over time". Nevertheless, its mandate is flexible to ensure stable output and employment, and to avoid the build-up of financial imbalances. The bank kept its main policy rate (on sight deposits) at a record-low 0.5% from March 2016 to accommodate the effect of the oil price-driven slowdown. In September 2018 the bank started its tightening cycle, lifting the rate by 25 basis points, to 0.75%. Further rate rises, amounting to 75 basis points in total, followed in March, June and September 2019, leaving the rate at 1.5% currently. Although global monetary policy became more dovish throughout 2019, Norges Bank has continued to raise interest rates, supported by strong underlying inflationary pressures and a depreciating krone. Looking ahead, owing to stabilising core inflation, we expect no further changes in the policy rate. A rate cut is unlikely in view of still­elevated asset prices and a tight labour market—which are reflected in solid core price pressures. We also do not expect a rate increase in the coming quarters, given cheaper oil prices, and concerns about economic diversification and competitiveness (which a stronger currency would erode). In 2021-24 we expect steady rate rises to keep inflation broadly at Norges Bank's target. We expect a rate hike in 2021 and 2023, placing the policy rate at 2% by 2024.

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International assumptions 2019 2020 2021 2022 2023 2024 Economic growth (%) US GDP 2.3 1.7 1.8 2.0 1.8 2.2 OECD GDP 1.6 1.5 1.8 1.9 1.8 2.0 EU28 GDP 1.4 1.4 1.7 1.7 1.6 1.8 World GDP 2.3 2.4 2.8 2.9 2.8 2.9 World trade 1.5 2.3 3.6 3.7 3.7 3.8 Inflation indicators (% unless otherwise indicated) US CPI 1.8 1.6 1.9 2.1 1.8 1.8 OECD CPI 1.9 1.8 2.0 2.2 2.1 2.0 EU28 CPI 1.5 1.5 1.8 1.9 1.9 1.9 Manufactures (measured in US$) -0.1 1.9 4.0 4.1 3.5 3.1 Oil (Brent; US$/b) 64.0 63.0 67.0 71.0 73.8 71.0 Non-oil commodities (measured in US$) -6.6 0.8 3.9 1.8 0.9 2.5 Financial variables US$ 3-month commercial paper rate (av; %) 2.2 1.5 1.5 1.8 2.2 2.3 € 3­month interbank rate (av; %) -0.4 -0.4 -0.4 -0.4 -0.2 0.0 Nkr:US$ (av) 8.8 8.8 8.6 8.2 8.0 7.9 US$:€ (av) 1.12 1.13 1.16 1.21 1.24 1.24

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79 Norway

Economic growth We estimate that growth will have receded slightly in 2019, to 1%, from 1.5% in 2018. This reflects slower oil extraction than in 2017 (a by-product of technical difficulties and the process of replacing ageing platforms in the North Sea), weighing on real export growth, and stronger import growth, which averaged 6.9% in January-September 2019. Despite difficulties in the offshore economy, growth in the mainland economy (which excludes the oil sector) is robust, growing at 2.6% on average in the first three quarters of 2019. This is due to the resurgence of fixed investment (particularly in machinery), but also to the solid growth of private consumption. These components grew by 7.1% and 1.7% respectively, reflecting the impact of tight labour markets (encouraging strong wage growth and productivity-enhancing investment), as well as healthy consumer and business confidence. We expect economic growth to gather pace from 2020. Petroleum-related investment, which started to recover in 2018, will continue to expand. Improved export performance (as the rally in the investment cycle bears fruit) and solid wage growth, which will spur private consumption, should also drive growth higher. Risks to our short-term outlook are balanced. Downside risks stem from further falls in oil prices and the fallout from higher interest rates on domestic demand. Upside risks stem from the prospect of an acceleration in investment and wage growth, which reached 3.5% year on year in January-June 2019. Beyond 2019, we expect investment to decelerate gradually as field development slows, with exports taking a greater share of growth as production levels increase compared with previous years. Growth in private consumption should also improve steadily, buoyed by solid real income growth and gains in house prices. Overall, GDP growth will average 2% in 2020-24. Economic growth % 2019a 2020b 2021b 2022b 2023b 2024b GDP 1.0 1.7 1.9 2.0 2.2 2.1 Private consumption 1.7 1.6 1.7 1.8 1.9 1.8 Government consumption 2.0 1.2 1.4 1.6 1.7 1.7 Gross fixed investment 7.1 3.2 2.6 2.6 2.0 2.2 Exports of goods & services 0.7 2.7 3.1 2.9 4.0 3.9 Imports of goods & services 5.6 2.7 2.7 2.6 3.1 3.4 Domestic demand 2.7 1.7 1.7 1.9 1.8 1.9 Agriculture 0.4 1.1 1.2 1.2 1.4 1.4 Industry 1.4 1.7 2.1 2.1 2.1 2.1 Services 0.8 1.7 1.8 2.0 2.2 2.1 a Economist Intelligence Unit estimates. b Economist Intelligence Unit forecasts.

Inflation Inflation has eased in 2019 after a particularly high base period for electricity prices in 2018, when low rainfall reduced hydroelectricity production, driving up prices. This surge generated inflation of 2.8% in that year. With hydroelectricity production restored in 2019, electricity prices are now falling, and we estimate that inflation will have declined to 2.2%. Looking ahead, we expect firm price growth in 2020-24, averaging 2%, owing to a tight labour market and solid growth in domestic demand. Further downward movements in the krone could generate an uptick in inflation, owing to higher import costs.

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80 Norway

Exchange rates The krone tends to follow developments in global energy markets, and has depreciated significantly on average against the US dollar and the euro since 2013, from an average of Nkr5.88:US$1 in 2013, to Nkr8.14:US$1 in 2018. In 2019 the krone has depreciated against the euro —a trend that will continue in 2020. We expect the declining price of oil, Norway's primary export, until 2020 to weaken the country's terms of trade and put pressure on the krone. However, in 2021 we expect the krone to rebound slightly as oil prices recover. Upward shocks to the oil price, chiefly from supply constraints in the Middle East, are a risk to our exchange-rate forecast.

External sector We estimate that the current-account surplus will have fallen in 2019, owing to surging import demand from investment projects, falling oil prices and markedly declining North Sea oil production (owing to technical difficulties on some platforms). We estimate the current-account surplus at 5.4% of GDP in 2019, from 8.1% in 2018, despite continued large surpluses on the primary income balance. Lower oil prices on average in 2020 will place downward pressure on the trade balance, although current-account surpluses are largely guaranteed by the oil industry and the GPFG, which supports Norway's substantial primary income surplus. We expect the oil sector to experience a revival in production from 2020 onwards as the strong investment growth in 2019 starts to raise production capacity. We expect this, combined with an upswing in global oil prices from 2021-22, to support a rise in the current-account surplus over the forecast period. In 2020-24 the structure of the current account will remain broadly unchanged, with the surplus averaging 6.5% of GDP.

Forecast summary Forecast summary (% unless otherwise indicated) 2019a 2020b 2021b 2022b 2023b 2024b Real GDP growth 1.0 1.7 1.9 2.0 2.2 2.1 Industrial production growth -4.2 2.3 4.1 2.7 3.1 3.1 Crude oil production ('000 b/d) 1,715 1,850 2,000 2,120 2,350 2,550 Natural gas production (Mtoe) 109.2 109.7 110.2 110.7 111.2 n/a Unemployment rate (av) 3.7 3.3 3.2 3.1 3.2 2.6 Consumer price inflation (av) 2.2 1.7 2.0 2.0 2.1 2.1 Short-term interbank rate 1.6 1.9 1.9 2.0 2.0 2.1 Government balance (% of GDP) 6.5 6.6 7.0 7.6 7.7 7.6 Exports of goods fob (US$ bn) 106.6 107.1 118.5 130.9 143.7 151.9 Imports of goods fob (US$ bn) 91.3 95.8 102.7 111.6 120.3 128.0 Current-account balance (US$ bn) 22.5 26.2 27.8 32.3 35.5 38.9 Current-account balance (% of GDP) 5.4 6.1 6.1 6.4 6.7 7.0 Exchange rate Nkr:US$ (av) 8.79 8.82 8.56 8.16 8.01 7.92 Exchange rate Nkr:¥100 (av) 8.10 8.32 8.18 8.09 8.20 8.30 Exchange rate Nkr:€ (av) 9.85 9.92 9.91 9.84 9.91 9.82 a Economist Intelligence Unit estimates. b Economist Intelligence Unit forecasts.

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81 Norway

Quarterly forecasts Quarterly forecasts 2019 2020 2021 1 Qtr 2 Qtr 3 Qtr 4 Qtr 1 Qtr 2 Qtr 3 Qtr 4 Qtr 1 Qtr 2 Qtr 3 Qtr 4 Qtr GDP % change, quarter on quarter -0.1 0.2 0.0 0.7 0.4 0.4 0.4 0.4 0.5 0.5 0.5 0.6 % change, year on year 1.2 1.2 0.6 0.9 1.4 1.6 2.0 1.7 1.8 1.8 2.0 2.1 Private consumption % change, quarter on quarter 0.5 0.3 0.4 0.0 0.4 0.4 0.4 0.3 0.4 0.5 0.5 0.5 % change, year on year 2.3 1.1 1.6 1.3 1.2 1.2 1.2 1.5 1.5 1.6 1.6 1.8 Government consumption % change, quarter on quarter 1.0 0.9 0.9 0.0 -0.7 0.4 0.4 0.2 0.9 0.2 0.2 0.2 % change, year on year 1.1 2.0 2.9 2.7 1.0 0.6 0.1 0.3 1.9 1.7 1.5 1.5 Gross fixed investment % change, quarter on quarter -2.1 3.1 4.8 0.0 1.6 -0.4 -0.4 -0.5 -0.4 1.3 1.3 1.3 % change, year on year 7.0 5.0 8.8 5.8 9.8 6.1 0.8 0.3 -1.7 0.0 1.7 3.6 Exports of goods & services % change, quarter on quarter 2.0 -0.3 -2.2 0.0 1.3 1.2 1.2 1.1 1.2 0.5 0.5 0.6 % change, year on year 2.6 1.4 -2.0 -0.5 -1.2 0.3 3.7 4.9 4.7 4.0 3.3 2.8 Imports of goods & services % change, quarter on quarter 3.1 1.5 1.2 0.0 -2.1 1.3 1.3 1.2 1.3 0.3 0.3 0.4 % change, year on year 6.5 4.9 7.1 6.0 0.6 0.5 0.5 1.8 5.2 4.2 3.1 2.3 Domestic demand % change, quarter on quarter 0.2 0.9 1.3 0.0 -0.3 1.4 -0.2 -0.4 0.2 1.3 0.3 0.2 % change, year on year 2.5 2.4 3.7 2.4 1.8 2.3 0.8 0.4 1.0 1.0 1.5 2.1 Consumer prices % change, quarter on quarter 0.4 0.3 0.3 0.5 0.4 0.4 0.4 0.4 0.5 0.6 0.6 0.6 % change, year on year 3.0 2.4 1.7 1.6 1.6 1.7 1.8 1.6 1.7 1.9 2.1 2.3 Producer prices % change, quarter on quarter -2.7 -2.9 -4.0 -0.3 -0.6 2.8 -0.8 2.2 -0.1 0.1 0.1 0.1 % change, year on year 5.9 -1.1 -9.6 -9.6 -7.6 -2.2 1.0 3.5 4.1 1.4 2.3 0.2 Exchange rate Nkr:US$ Average 8.58 8.64 8.86 9.08 8.91 8.90 8.73 8.73 8.66 8.61 8.51 8.47 End-period 8.64 8.53 9.08 9.04 8.90 8.81 8.73 8.69 8.64 8.56 8.49 8.43 Interest rates (%; av) Money market rate 1.3 1.5 1.6 1.9 1.9 1.9 1.9 1.9 1.9 2.0 1.9 1.9 Long-term bond yield 1.7 1.6 1.3 1.4 1.4 1.5 1.5 1.5 1.6 1.6 1.6 1.5

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82 Norway

Data and charts Annual data and forecast

2015a 2016a 2017a 2018a 2019b 2020c 2021c GDP Nominal GDP (US$ bn) 386.0 367.8 398.4 435.2 414.8 426.9 458.0 Nominal GDP (Nkr bn) 3,113 3,089 3,294 3,542 3,647 3,764 3,922 Real GDP growth (%) 1.8 0.5 2.7 1.5 1.0 1.7 1.9 Expenditure on GDP (% real change) Private consumption 2.6 0.9 2.6 2.0 1.7 1.6 1.7 Government consumption 2.3 1.4 1.9 1.4 2.0 1.2 1.4 Gross fixed investment -3.9 3.8 2.6 2.8 7.1 3.2 2.6 Exports of goods & services 5.0 0.7 2.1 0.1 0.7 2.7 3.1 Imports of goods & services 1.0 2.1 2.3 1.9 5.6 2.7 2.7 Origin of GDP (% real change) Agriculture -6.8 -7.1 4.0 0.2 0.4 1.1 1.2 Industry 1.7 0.6 3.3 -0.7 1.4 1.7 2.1 Services 2.4 1.4 1.7 2.4 0.8 1.7 1.8 Population and income Population (m) 5.2 5.3 5.3 5.3 5.4 5.4 5.5 GDP per head (US$ at PPP) 60,228 57,381 61,824 65,590 67,317 69,151 71,205 Recorded unemployment (av; %) 4.5 4.7 4.2 3.9 3.7 3.3 3.2 Fiscal indicators (% of GDP) General government budget revenue 54.9 55.3 55.1 55.9 55.2 55.2 55.2 General government budget expenditure 48.9 51.3 50.1 48.7 48.7 48.6 48.2 General government budget balance 6.1 4.1 5.0 7.2 6.5 6.6 7.0 General government debt 33.4 37.3 37.8 39.1 37.1 35.8 33.5 Prices and financial indicators Exchange rate Nkr:US$ (av) 8.06 8.40 8.27 8.14 8.79 8.82 8.56 Exchange rate Nkr:€ (av) 8.95 9.29 9.34 9.61 9.85 9.92 9.91 Consumer prices (av; %) 2.2 3.5 1.9 2.8 2.2 1.7 2.0 Producer prices (av; %) -8.1 -8.0 9.3 14.8 -3.8 -1.5 2.0 Stock of money M1 (% change) n/a 4.3 5.5 7.8 3.2 3.3 4.3 Stock of money M2 (% change) 0.6 5.1 6.0 5.3 3.0 3.4 4.1 Lending interest rate (av; %) 3.0 3.0 2.9 3.0 3.4 3.7 3.6 Current account (US$ bn) Trade balance 27.5 12.9 23.2 33.6 15.4 11.3 15.9 Goods: exports fob 103.8 88.9 103.8 121.9 106.6 107.1 118.5 Goods: imports fob -76.3 -76.0 -80.6 -88.3 -91.3 -95.8 -102.7 Services balance -5.6 -6.9 -9.3 -8.3 -8.8 -7.0 -9.3 Primary income balance 16.1 15.7 11.1 12.6 22.2 28.3 27.6 Secondary income balance -6.9 -7.0 -6.6 -6.4 -6.2 -6.4 -6.4 Current-account balance 31.1 14.8 18.4 31.4 22.5 26.2 27.8 International reserves (US$ bn) Total international reserves 57.5 60.4 65.9 63.1 n/ac n/a n/a a Actual. b Economist Intelligence Unit estimates. c Economist Intelligence Unit forecasts. Sources: IMF, International Financial Statistics; Statistics Norway; Federal Reserve Board; Eurostat.

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83 Norway 12 Quarterly data 2017 2018 2019 4 1 2 4 1 2 3 Qtr 3 Qtr Qtr Qtr Qtr Qtr Qtr Qtr Output GDP at chained 2015 prices (Nkr bn) 829.0831.6833.9 839.2842.6841.8843.7 843.9 Industrial production index (2005=100)a 85.0 87.9 87.1 87.9 87.4 83.6 82.5 81.0 Intermediate goods (2005=100)a 92.7 92.0 92.0 92.0 92.0 93.6 n/a n/a Consumer goods (2005=100)a 109.0109.2109.2 109.2109.2109.3 n/a n/a Employment, wages and prices Employment (‘000) 2,6522,6602,697 2,7132,7082,6922,719 2,755 Unemployment rate (seasonally adjusted; % of the labour 5.4 5.3 5.3 5.3 5.3 5.3 n/a n/a force) Monthly earnings (2016,Q1=100)b 100.9104.5106.6 101.6103.9108.0 n/a n/a Consumer prices (2015=100) 106.1107.0107.9 109.1109.7110.2110.5 110.9 Consumer prices (% change, year on year) 1.3 2.0 2.4 3.3 3.4 3.0 2.4 1.7 Consumer prices adjusted for tax changes & excl energy 1.1 1.2 1.2 1.7 2.0 2.4 n/a n/a products (2015; % change, year on year) Wholesale prices (2015=100) 111.6113.0115.3 115.7116.8117.5 n/a n/a Producer prices (2000=100; % change, year on year) 8.5 7.0 15.6 22.3 14.8 5.9 -1.1 -9.6 Brent spot crude oil price (US$/b) 61.5 67.0 74.5 75.5 67.4 n/a n/a n/a Financial indicators Exchange rate Nkr:US$ (av) 8.17 7.84 8.02 8.24 8.45 8.58 8.648.8636 Exchange rate Nkr:US$ (end-period) 8.18 7.85 8.15 8.13 8.65 8.64 8.53 9.08 Exchange rate Nkr:€ (av) 9.62 9.63 9.55 9.58 9.63 9.74 9.72 9.85 Exchange rate Nkr:€ (end­period) 9.84 9.64 9.51 9.47 9.95 9.66 9.69 9.90 Norges Bank sight deposit rate (end-period; %) 0.50 0.50 0.50 0.75 0.75 1.00 n/a n/a Long-term govt bonds (10 years) rate (av; %) 1.6 1.9 1.9 1.8 1.9 1.7 1.6 1.3 M1 (end-period; Nkr bn)c 1,9452,0382,124 2,0982,0972,1232,184 2,173 M1 (% change, year on year) 5.5 8.9 9.8 8.9 7.8 4.2 2.8 3.5 M2 (end-period; Nkr bn)c 2,1392,1902,278 2,2522,2532,2892,359 2,352 M2 (% change, year on year) 6.0 5.5 6.5 5.5 5.3 4.6 3.6 4.5 OSE All-share index (Dec 29th 1995=100) 884.5912.4983.31021.5981.6967.3 n/a n/a Sectoral trends Crude oil production (m barrels/day) 1.92 1.96 1.79 1.80 2.80 n/a n/a n/a Extraction and related services production (2005=100)a 70.9 70.9 71.1 71.7 71.4 n/a n/a n/a Manufacturing turnover (2005=100)a 145.7144.8151.2 154.0156.2156.9 n/a n/a New orders, manufacturing (2005=100) 138.4 n/a n/a n/a n/a n/a n/a n/a Housing starts (‘000) 4.9 5.1 5.1 5.1 5.1 n/a n/a n/a Retail sales (value; 2010=100) 105.1107.7106.8 107.5108.6107.5 n/a n/a Foreign trade and payments Exports fob (Nkr bn) 65.1 62.5 62.5 62.5 62.5 64.1 n/a n/a Exports of oil & gas (Nkr bn) 26.6 26.2 26.2 26.2 26.2 n/a n/a n/a Imports cif (Nkr bn) 50.5 49.0 49.0 49.0 49.0 49.6 n/a n/a Trade balance (Nkr bn) 14.5 13.5 13.5 13.5 13.5 14.5 n/a n/a Current-account balance (Nkr bn) 12.4 69.8 58.8 83.9 39.8 66.9 n/a n/a Reserves excl gold (end-period; US$ bn) 65.9 67.3 65.9 65.2 63.1 67.9 69.1 68.4 a Seasonally adjusted. b Manufacturing. c Norges Bank. Sources: OECD, Main Economic Indicators; Statistics Norway, Monthly Bulletin of Statistics, Economic Survey; IEA, Monthly Oil Market Report; IMF, International Financial Statistics.

Monthly data Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Exchange rate Nkr:US$ (av) 2017 8.46 8.32 8.51 8.59 8.51 8.46 8.15 7.89 7.84 8.00 8.19 8.32 2018 7.90 7.84 7.77 7.85 8.10 8.11 8.13 8.34 8.25 8.25 8.48 8.63 2019 8.55 8.59 8.61 8.56 8.74 8.63 8.62 8.97 9.01 9.15 9.15 n/a Exchange rate Nkr:US$ (end-period) 2017 8.24 8.37 8.58 8.57 8.44 8.38 7.89 7.77 7.96 8.16 8.29 8.18 2018 7.70 7.88 7.85 8.02 8.18 8.15 8.15 8.39 8.13 8.41 8.59 8.65

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84 Norway 13 2019 8.44 8.55 8.64 8.64 8.76 8.53 8.78 9.12 9.08 9.18 9.22 n/a Real effective exchange rate (2010=100; CPI-basis) 2017 87.3 88.1 86.2 85.0 84.4 84.2 85.7 87.0 86.9 86.2 84.3 82.6 2018 84.4 84.9 86.0 85.9 85.6 86.6 87.3 86.6 87.0 87.5 86.0 84.9 2019 84.7 84.9 84.8 85.4 84.5 84.7 85.2 83.1 83.0 81.5 n/a n/a M1 (end-period; % change, year on year) 2017 5.0 4.9 5.7 5.3 5.3 4.6 5.0 4.1 4.2 5.1 5.3 5.5 2018 9.3 8.2 8.9 10.1 10.7 9.8 9.5 10.0 8.9 7.2 7.9 7.8 2019 3.8 4.3 4.2 2.2 3.2 2.8 3.6 5.1 3.5 3.9 n/a n/a M2 (end-period; % change, year on year) 2017 6.1 6.2 7.3 7.0 6.9 6.5 6.7 5.8 5.8 6.2 6.1 6.0 2018 6.5 5.3 5.5 6.3 7.4 6.5 5.8 6.3 5.5 4.4 5.1 5.3 2019 4.2 4.9 4.6 3.0 4.1 3.6 4.4 5.9 4.5 4.9 n/a n/a Sight deposit rate (end-period; %) 2017 0.65 0.70 0.69 0.69 0.67 0.63 0.62 0.62 0.61 0.59 0.58 0.56 2018 0.55 0.62 0.67 0.64 0.60 0.59 0.59 0.60 0.66 0.67 0.69 0.82 2019 0.70 0.72 0.82 0.82 0.85 0.90 0.92 0.95 1.02 n/a n/a n/a Overnight lending rate (end-period; %) 2017 3.04 2.87 3.05 3.08 2.79 2.88 2.82 2.87 2.85 2.81 2.72 2.87 2018 2.83 3.02 2.96 3.15 2.94 3.01 3.06 2.75 2.97 3.07 2.99 3.34 2019 3.20 3.18 3.28 3.36 3.33 3.33 3.61 3.57 3.52 n/a n/a n/a Industrial production (% change, year on year) 2017 1.3 1.3 1.3 1.3 0.3 5.2 1.5 6.6 12.2 -2.3 -1.6 0.9 2018 1.3 1.4 0.5 -1.4 -2.0 2.6 0.6 2.2 -0.1 4.5 2.2 1.8 2019 -3.3 -5.3 -6.3 -4.3 -2.5 -8.8 -5.7 -9.4 -8.2 -5.8 n/a n/a Retail sales, volume (seasonally adjusted; % change, year on year) 2017 -0.8 1.5 2.4 2.2 2.7 2.5 3.3 2.2 1.5 0.6 2.9 4.2 2018 1.8 1.3 1.1 1.8 2.5 -0.3 0.0 1.0 1.0 0.8 0.1 -1.0 2019 1.1 -0.9 0.0 1.4 -2.3 0.3 0.9 0.5 0.9 0.1 n/a n/a Unemployment rate (seasonally adjusted; % of the labour force) 2017 4.1 4.3 4.4 4.5 4.5 4.3 4.1 4.1 4.0 3.9 4.0 4.0 2018 4.0 3.9 3.9 3.8 3.9 3.9 3.9 4.0 4.0 4.0 3.7 3.7 2019 3.8 3.8 3.5 3.3 3.4 3.6 3.8 3.7 3.9 n/a n/a n/a OSE All-share Index (Dec 29th 1995=100) 2017 777 772 766 761 788 773 787 807 838 871 892 890 2018 930 902 905 947 996 1,008 1,004 1,022 1,039 1,026 983 937 2019 944 971 987 1,003 981 966 975 932 984 985 1,006 n/a Consumer prices (av; % change, year on year) 2017 2.8 2.5 2.4 2.2 2.2 1.9 1.4 1.2 1.5 1.2 1.1 1.6 2018 1.6 2.2 2.2 2.4 2.3 2.6 2.9 3.4 3.4 3.1 3.6 3.5 2019 3.1 3.0 2.9 2.9 2.5 1.9 1.9 1.6 1.5 1.8 1.6 n/a Producer prices (av; % change, year on year) 2017 12.8 18.9 16.3 12.7 8.8 3.3 1.9 4.2 8.8 8.9 9.5 7.1 2018 10.3 4.6 6.3 12.2 14.4 20.2 22.8 22.9 21.1 22.6 14.6 7.6 2019 4.9 7.9 5.2 2.6 0.5 -6.3 -8.5 -9.4 -10.8 -13.8 -9.6 n/a Goods exports fob (Nkr bn) 2017 77.5 71.0 78.2 68.6 68.9 69.0 62.9 68.7 66.5 75.3 78.9 78.1 2018 85.6 75.9 81.6 79.8 79.9 79.3 81.7 86.9 81.6 98.2 87.0 79.7 2019 86.7 76.5 85.3 77.3 76.1 66.1 66.6 66.0 66.0 71.8 n/a n/a Goods imports cif (Nkr bn) 2017 51.8 48.8 57.2 43.9 59.5 67.3 47.1 55.4 59.7 56.5 83.9 53.3 2018 54.7 51.0 64.2 63.5 63.3 59.0 54.8 56.4 59.3 65.6 65.1 53.4 2019 60.4 62.2 66.8 62.2 67.2 60.1 59.9 60.0 67.4 65.9 n/a n/a Trade balance fob-cif (Nkr bn) 2017 25.7 22.2 21.1 24.7 9.4 1.6 15.8 13.4 6.8 18.8 -5.0 24.9 2018 30.9 24.9 17.4 16.2 16.7 20.3 26.8 30.5 22.3 32.6 22.0 26.3 2019 26.3 14.2 18.5 15.0 8.9 6.0 6.7 6.0 -1.4 5.9 n/a n/a Foreign-exchange reserves excl gold (US$ bn) 2017 61.9 61.6 61.3 66.2 65.4 64.8 65.0 64.3 65.3 65.1 66.1 65.9 2018 69.3 67.5 67.3 67.8 67.4 65.9 66.3 66.5 65.2 63.6 62.7 63.1 2019 65.5 66.3 67.9 68.7 67.7 69.1 67.5 68.1 68.4 67.4 n/a n/a Sources: IMF, International Financial Statistics; Haver Analytics.

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85 Norway 14 Annual trends charts

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86 Norway 15 Quarterly trends charts

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87 Norway 16 Monthly trends charts

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88 Norway 17 Comparative economic indicators

Basic data Total land area 323,758 sq km plus the Svalbard (Spitzbergen) islands (61,020 sq km) and Jan Mayen Island (377 sq km), making a total of 385,155 sq km. Of the total mainland area, 3% is agricultural and 22% is forest Population 5,328,212 (January 1st 2019) Country Report January 2020 www.eiu.com © Economist Intelligence Unit Limited 2020

89 Norway 18 Main towns Population in city-regions (January 1st 2018) Oslo (capital): 673,469 Bergen: 279,792 Trondheim: 193,501 Stavanger: 133,140 Climate Temperate, cold inland and arctic in the north Weather in Oslo (altitude 94 metres) Hottest month, July, 16.4°C (average daily temperature); coldest month, January, ­4.3°C (average daily temperature); driest month, February, 36 mm average rainfall; wettest month, September, 90 mm average rainfall Language Bokmal (influenced by Danish) and Nynorsk (based on dialects) are both officially recognised Weights and measures Metric system Currency Norwegian krone (Nkr) = 100 ore Fiscal year January-December Time One hour ahead of GMT Public holidays January 1st (New Year's Day), April 9th (Maundy Thursday), April 10th (Good Friday), April 13th (Easter Monday), May 1st (May Day), May 17th (Constitution Day), June 1st (Whit Monday), December 25th (Christmas Day), December 26th (St Stephen's Day), December 31st (New Year's Eve). There is no compensation if a public holiday falls on a Saturday or Sunday

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Political structure Official name Kingdom of Norway Form of state

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91 Norway 20 Constitutional monarchy Legal system Based on the constitution of 1814 National legislature Storting (parliament) of 169 members directly elected by proportional representation (modified Sainte-Lague system) for a four-year term; for the purpose of discussing new legislation, the Storting sits as a single body. There is no right of dissolution between elections Electoral system Universal direct suffrage over the age of 18 National elections Last general election held on September 11th 2017; the next general election will take place in 2021 Head of state King Harald acceded to the throne in 1991 National government Statsrad (Council of State) headed by the prime minister, who is responsible to the Storting. The government formed after the September 2017 election is composed of the Conservatives, the Progress Party (FrP), the Liberals and the Christian Democrats (KrF) Main political parties Conservatives (H, 45 seats); Progress Party (FrP, 27 seats); Christian Democrats (KrF, eight seats); Liberals (V, eight seats); Labour Party (A, 49 seats); Centre Party (Sp, 19 seats); Green Party (MG, one seat); Socialist Left Party (SV, 11 seats); Red Party (R, one seat) Council of State Prime minister: Erna Solberg (H) Key ministers Agriculture & food: Olaug Bollestad (KrF) Children & families: Kjell Ingolf Ropstad (KrF) Climate & environment: Ola Elvestuen (V) Culture & equality: Trine Skei Grande (V) Defence: Frank Bakke-Jensen (H) Digitalisation: Nikolai Astrup (H) Education & integration: Jan Tore Sanner (H) Elderly & public health: Sylvi Listhaug (FrP) Finance: Siv Jensen (FrP) Fisheries: Harald Tom Nesvik (FrP) Foreign affairs: Ine Eriksen Soreide (H) Health: Bent Hoie (H) International development: Dag Inge Ulstein (KrF) Justice & immigration: Joran Kallmyr (FrP) Labour & social affairs: Anniken Hauglie (H)

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92 Norway 21 Local government & modernisation: Monica Maeland (H) Petroleum & energy: Kjell-Borge Freiberg (FrP) Research & higher education: Iselin Nybo (V) Security: Ingvil Smines Tybring-Gjedde (FrP) Trade & industry: Torbjorn Roe Isaksen (H) Transport & communications: Jon Georg Dale (FrP) Speaker of the Storting Tone Wilhelmsen Troen (H) Central bank governor Oystein Olsen

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93 Norway 22 Recent analysis

Generated on January 23rd 2020 The following articles were published on our website in the period between our previous forecast and this one, and serve here as a review of the developments that shaped our outlook. Politics Forecast updates Benefits scandal damages government December 9, 2019: Political stability Event The head of the benefits division in the Norwegian Labour and Welfare Administration (NAV), Kjersti Monland, resigned on December 4th (effective December 9th) after it was revealed that the agency wrongfully convicted at least 48 welfare claimants for falsely claiming welfare payments. Analysis The NAV is responsible for payment of unemployment benefits, pensions and child benefits, and, under the rules of the European Economic Area (EEA), these must be paid to Norwegian claimants who are temporarily living in another EEA country. The scandal occurred from January 2012, when the NAV ignored newly-implemented EEA rules and incorrectly denied payment to at least 2400 Norwegians living abroad, convicting at least 48 people of fraud, including prison sentences. The scandal could lead to the dismissal of the head of the NAV, Sigrun Vageng, alongside the Conservative minister for labour, Anniken Hauglie. Although the scandal has damaged the reputation of the NAV inside Norway, the political fallout has been limited. The leader of the far-left Red Party, Bjornar Moxnes, called for Ms Haugile's resignation in a no-confidence motion in parliament on November 27th. The motion failed, as it did not have the support of either of the other left-wing parties. However, further details regarding Ms Haugile's knowledge of the affair has embarrassed the government. On December 6th a leaked email from November 2018 revealed that Ms Haugile knew of the imprisoning of benefit claimants before a statement to parliament in which she claimed to have no knowledge of the scandal. With this latest revelation, alongside the ongoing investigation into the NAV and Ms Haugile's handling of the scandal, there is a risk of further dismissals, including of Ms Haugile or Ms Vageng. Nevertheless, although the NAV scandal could sway public opinion against the government, we judge that there will be limited immediate impact on political stability. The ruling right-wing coalition commands a majority in parliament which, even in the face of a united left-wing opposition, will not be lost before the election to be held in September 2021. Moreover, the risk of a fragmentation of the coalition, which was heightened in the run-up to local elections held in September 2019, has receded with the successful passing of the budget on October 7th. Impact on the forecast Although it is possible that the scandal could lead to the resignation of Ms Haugile, we maintain our forecast that the right-wing government will serve its full term to 2021.

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WTO's dispute-settlement mechanism collapses December 11, 2019: International relations Event On December 10th two of the three remaining judges on the appellate body of the World Trade Organisation (WTO)—the main dispute­settlement body of that institution—retired from service. As a minimum quorum of three judges is required for the appellate body to function, the event effectively marked the collapse of the WTO's dispute-settlement mechanism. Analysis The US has had long-standing grievances with the appellate body (and the WTO more generally), even in the face of several WTO cases that it has won recently. These objections also predated the administration of Donald Trump, the current US president. US concerns over the role of the appellate body—including allegations that it had overstepped its jurisdiction—arose during the presidency of George W Bush (2000­08), whose administration took issue with the body's findings that the US methodology for calculating anti-dumping and countervailing duties (a controversial practice known as "zeroing") were not WTO-compliant. This attitude hardened under the presidency of Barack Obama (2008-12), who blocked the reappointment of two appellate body judges (and obstructed consensus over the appointment of a third) during his time in office. Mr Trump has since maintained this strategy of blocking appointments. The Economist Intelligence Unit had expected this outcome because of the president's long-harboured hostility towards the WTO. However, the collapse of the dispute-settlement mechanism will not immediately spell doom for either the WTO itself or the future of global commerce. We continue to expect global trade growth (by volume) to rebound modestly into positive territory in 2020, as the world acclimatises to the "new normal" of US-China economic tension and trade demand stabilises across major markets. Nevertheless, the dissolution of the WTO's main dispute-settlement mechanism will erode important constraints on protectionist bad behaviour. There is now a growing risk that the lack of an international arbiter will allow both existing and future trade disputes to escalate more quickly. This will be particularly critical as the US-China trade war persists into 2020, while emerging disputes elsewhere—such as between South Korea and Japan, France and the US and the EU and Malaysia—weigh on the prospects of trade liberalisation more generally. Without the appellate body, these and other potential trade conflicts will continue to cast a shadow over world trade next year. Impact on the forecast We had anticipated that the WTO appellate body would cease to function by December, and have already built this event into our forecasts from 2020 onwards.

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Thunberg criticises government policy on oil exploration December 16, 2019: Political stability Event Greta Thunberg, an environmental campaigner, sent a letter to the Norwegian government criticising its support of further oil exploration in the Norwegian continental shelf, the area of Norway's waters that contains oil and gas. Analysis Ms Thunberg's criticism adds to domestic political pressure on the oil and gas sector in Norway. The rise of the Green Party in recent local elections was in part owing to greater awareness of environmental issues in the wider electorate. The annual Climate Barometer survey, released by Kantar (a pollster) and presented on November 27th, found that climate change was regarded as the public's most important political issue. Norway is a signatory to the Paris Agreement on climate change and has pledged to cut its net emissions to zero by 2030. However, according to Statistics Norway, its domestic emissions increased by about 3.4% from 1990 to 2017, in contrast with the wider EU, where emissions have fallen by 22% over the same period. This is largely due to the influence of the oil sector. Emissions data for 2018 revealed that although Norway's emissions from the industrial and household sectors have fallen considerably since 1990, by about 39% and 69% respectively, emissions from the oil and gas sector have increased by 73%. This increase in oil sector emissions has pushed aggregate CO2 emissions in Norway above the rest of the EU, forcing it to subsidise emissions reduction elsewhere. Although political pressure on the government to reduce domestic emissions is rising, we do not expect any advance in environmentalist legislation over the forecast period (2020-24). The centre- left opposition Labour Party (traditionally in favour of the oil sector) is split on further oil exploration, and the largest two governing parties (the centre-right Conservatives and the far-right Progress Party) are strongly in favour. Moreover, exploitation of Norway's gas reserves has fuelled a transition in Europe towards gas and away from coal (a more emissions-intensive fuel), thereby reducing regional emissions. The oil sector also remains vital to Norway's external balance (comprising 53% of good exports in 2018) and is an important employer, hiring 6% of Norway's labour force. We judge that gas's wider role in Europe's energy transition and the oil sector's importance in the national economy will halt any wider environmentalist effort. Impact on the forecast We maintain that the oil sector's generous tax breaks will not be changed over the forecast period, despite the pressure from environmentalist parties.

Analysis NATO London summit: unhappy birthday ahead December 3, 2019 Landmark birthdays are usually cause for celebration, but there is likely to be little good cheer at a meeting to mark NATO's 70th anniversary in Watford, a city just outside the British capital, this week. Instead, the gathering is likely to resemble a tense family reunion, with all parties hoping to escape without anyone making a scene. Despite the potential for fallings-out, we expect leaders to stay on message at a strictly choreographed series of events, but the occasion will not resolve any of the sources of tension within the alliance. As always, the guest most likely to cause offence will be the US president, Donald Trump. He has often looked bored, miserable and isolated at international gatherings, but this meeting might actually prove a welcome distraction. It will enable him to take a break from the incessant buzz of the ongoing impeachment process against him. Trump trumpeting

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The NATO meeting will allow Mr Trump to boast about a rare foreign policy success. During his presidential election campaign Mr Trump regularly complained about fellow NATO members failing to spend the recommended 2% of their GDP on defence. As president, he has mused out loud about taking the US out of the organisation. Whether Mr Trump was ever serious about this threat is a moot point, but nonetheless, a US withdrawal would be a disaster for NATO. Accordingly, the organisation's secretary-general, Jens Stoltenberg, announced that nine NATO members would meet the 2% threshold in 2019, compared with five in 2016. He also added that members had committed to spending a total of US$130bn more on defence by 2020 relative to 2016. The size of the US economy means that it will remain overwhelmingly the largest source of defence spending within the alliance, but the US's allies are now providing more support. This move has not been lost on Mr Trump, who took full credit for it on Twitter, a social media platform, prior to flying to the UK. Mr Trump's foreign policy wins have regularly fallen well short of his aims, but this is a genuine success for his bull-headed approach to diplomacy. Tariffs and tough talks with EU counterparts There are other delicate issues that Mr Trump could weigh in on. The British prime minister, Boris Johnson, is in the middle of a general election campaign, and Mr Trump has previously been supportive of Mr Johnson's main campaign pledge: to complete the Brexit process. However, Mr Trump is highly unpopular in the UK, and Mr Johnson would prefer Mr Trump to keep quiet on the issue. The potential access of US pharmaceutical firms to the procurement system of the British National Health Service (NHS) is also a highly contentious point and has become a central campaign issue. On the eve of the meeting Mr Trump threatened to impose tariffs of up to 100% on French products, such as champagne and cheese, after a US government investigation concluded that a proposed French digital services tax would be "unusually burdensome" for US tech firms, such as Amazon and Alphabet. The US trade representative, Robert Lighthizer, suggested that the US was considering whether to investigate similar digital tax policies in other NATO member states. Against this backdrop, Mr Trump can expect frosty discussions with Emmanuel Macron, his French counterpart. Mr Trump is also scheduled to have a bilateral meeting with the German chancellor, Angela Merkel, on December 4th. The two have none of the personal chemistry that Mr Trump likes to build with foreign leaders. Additionally, or perhaps accordingly, Mr Trump has frequently been critical of Germany, which he believes is responsible for the strong euro and considers too successful in selling cars in the US, to the detriment of the US's trade balance. The possibility of US tariffs on the European car industry has been hanging over the EU for the past 18 months, although it now appears that the US has lost its window of opportunity to impose these tariffs. Ms Merkel will not want to be bullied, but will not wish to antagonise the US president either. Existential questions Finally, there is a tangled web of views on Turkey among NATO members. Mr Macron recently declared that NATO was brain dead and questioned whether the alliance would respond if Syria retaliated against the Turkish invasion of its Kurdish north. NATO's Article 5 says that an attack on any NATO member is an attack on the organisation, but NATO members have been reticent to engage in the Syrian civil war. Turkey has also irritated the US and other NATO members by buying defence systems from Russia that are not interoperable with NATO standards, and by insisting that Kurdish militias, which have fought alongside US forces in Syria, are labelled as terrorists by NATO. There is simply neither the time nor the political will for NATO leaders to address existential questions about the alliance at the summit. Talk, or at least that which is made public, is likely to be kept light, and there will be many declarations of faith in NATO's mission and its ability to maintain peace in Europe throughout its 70 years of existence. However, it would be naïve not to acknowledge the deep divisions in ideology that exist within the current generation of leaders. Merely holding the alliance together represents a victory of sorts for Mr Stoltenberg and his staff.

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97 Norway 26 Economy Forecast updates Trade deficit weakens current-account surplus December 9, 2019: External sector Event According to the latest balance of payments published by Statistics Norway, a merchandise trade deficit emerged in the third quarter of 2019, causing the current-account surplus to decrease to Nkr23.9bn ($2.7bn). The current-account surplus is now equivalent to just 2.8% of GDP. Analysis The dwindling current-account surplus was almost entirely owing to a large fall in export earnings from crude oil and natural-gas extraction, down by 38.3% year on year, to Nkr90.5bn. Although dated Brent Blend spot prices averaged $62/barrel in the third quarter, down from $75.1/b a year earlier, production stoppages were also to blame, caused by maintenance on offshore oil and gas fields. Given the prospect of output returning to normal as this work is completed, there is limited reason to be concerned by recent trends. Moreover, hydrocarbons production and exports will be further improved as a result of increasing investment in the oil sector. Total merchandise exports declined by 21.1% year on year, to Nkr195.9bn, despite exports of Norway's non-petroleum related traditional goods, such as chemicals, forestry products, metals and fish growing by 4.3%, to Nkr103.2bn. Goods imports increased in value, by 10.3% year on year, to Nkr200.5bn, resulting from domestic demand for ships, cars, and machinery and equipment culminating rather unusually for Norway, in a trade deficit of Nkr4.6bn. The trade balance last moved into deficit in the final months of 1998, when oil prices were below $20/b. The services balance is consistently in deficit. It totalled Nkr7.5bn in the third quarter, narrowing by 19.1% year on year, with the rise in services exports (11.5%) exceeding imports (8.9%), owing to growth in exports of shipping, travel and transport services. It is also normal to have the secondary income balance in deficit, reflecting Norway's net contributions to foreign organisations and overseas aid—the latter comprising slightly over 1% of GDP, more than half of which passes through the UN and World Bank. It narrowed by 5%, to Nkr12.5bn, in September. As for the primary income surplus—comprising employee compensation and investment income—this increased by 21.7%, to Nkr48.5bn, highlighting the returns building up in Norway's sovereign wealth fund. Impact on the forecast In January-September the current-account surplus fell by Nkr95bn annually. It averaged 4.4% of GDP, signalling a smaller outturn than we expected for 2019, given the drop in export earnings. Our estimate of the full-year 2019 current-account surplus has been downgraded accordingly, but we still anticipate a rise for 2020 as hydrocarbons production recovers.

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Core inflation falls in line with Norges Bank’s target December 10, 2019: Inflation Event In November the annual rate of inflation slowed to 1.6%, from 1.8% in October, according to consumer price data from Statistics Norway. Inflation adjusted for tax changes and energy prices —the core inflation measure used by Norges Bank (the central bank)—decelerated to 2%, Norges Bank's target. Analysis Inflation receded in November, aided by a high base (since inflation accelerated to 3.5% in November 2018). Clothing price inflation was more subdued, with footwear prices continuing to edge slightly downwards. A much softer increase in air-travel prices ahead of the holiday season also dragged on transport prices, and electricity prices also declined by 4.1%, in line with trends evidenced throughout the year. These effects offset higher inflation recorded in other sectors, such as furniture and furnishings, and household equipment and communications (mainly telephone equipment). There was also a much softer decline in the price of petrol this November, owing to the slower declines in the price of oil since the start of 2019. Norges Bank has kept its main policy interest rate unchanged since raising the policy rate to 1.5% in August, tightening the monetary policy stance to address rising capacity constraints and supporting the krone exchange rate. At a subsequent meeting in October, the central bank reiterated its forward guidance, signalling that there would be no pressure for additional policy tightening. The inflation trend validates this, indicating that there is no cause for alarm, despite Oystein Olsen, the governor of Norges Bank, expressing some concern about the krone's trade- weighted exchange rate. It has fallen by 6% year on year, to a new low, this month. Inflation should remain subdued in December and in early 2020, but will probably trend upwards throughout 2020, notably through the second half of the year (owing to a lower base). Norges Bank will be hesitant to tighten monetary policy further—we expect it to keep the policy rate stable at its next meeting on December 19th. Norway's latest Regional Network Report underlines this by pointing slower economic growth through the autumn, with transport projects delayed (affecting construction), retail sales declining and oil sector demand less sharp. The report also signals moderate wage growth in 2020. Impact on the forecast The headline rate of inflation averaged 2.2% in January-November, and we expect it to fall to 1.7% on a year-average basis in 2020, easing the pressure on Norges Bank for higher interest rates. We now expect Norges Bank to keep interest rates constant throughout 2020.

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November trade surplus rises sharply December 16, 2019: External sector Event In November the headline trade surplus (not seasonally adjusted), released by Statistics Norway, widened to Nkr18.8bn (US$2.1bn), from Nkr6bn in October. However, the surplus remained below the year-earlier figure of Nkr21.9bn. On a cumulative basis (January-November) the trade surplus amounted to Nkr125.1bn, down by 52% compared with a year earlier. Analysis The mainland trade deficit (excluding oil, natural gas and condensates) reached Nkr20.3bn in November, narrowing by Nkr2.9bn from the October figure. This was owing to a fall in mainland imports, which declined by Nkr3.5bn month on month. Mainland exports declined slightly, driven by a small decrease in chemicals exports. Imports declined on an annual basis, as imports of capital goods started to decrease, with machinery imports falling by 14.7%. This aligned with our expectation of a slowing reinvestment cycle on the North Sea. The improvement in the overall trade surplus was owing to a surge in offshore exports, as oil and gas production rose sharply month on month. The export of oil led the upswing, rising by Nkr9bn, whereas gas exports remained flat, at about Nkr10.5bn. Nevertheless, the oil sector remains largely responsible for the sharp deterioration in the trade balance since the start of 2019. On a cumulative basis, gas exports from January-November are down by about 35.5% from a year earlier, and oil exports by 11.1%. Technical difficulties throughout 2019 on certain platforms in the Norwegian Continental Shelf (the area of Norwegian waters containing the country's oil reserves) are partially responsible for this decline, but lower prices also play a role. Average oil prices fell by 11.8% and gas prices by 37.1%, according to the World Bank. However, rebounding production should improve the trade surplus into 2020, despite an expected decline in oil prices. Although investment growth in the oil sector is expected to weaken, robust exploration activity throughout the Norwegian Continental Shelf should buttress the external position over the 2020-24 forecast period. Moreover, a trend towards natural gas consumption (at the expense of coal) throughout Europe should also strengthen demand over this period. Impact on the forecast We maintain our forecast that the current-account surplus will equal 6.1% of GDP in 2020, before strengthening to an average of 6.5% in 2021-24.

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100 Norway 29

Norges Bank holds rates at final meeting of 2019 December 20, 2019: Monetary policy outlook Event At its last scheduled meeting of 2019 the executive board of Norges Bank (the central bank) took the unanimous decision to keep its main policy interest rate—the sight deposit rate—unchanged, at 1.5%. The overnight lending rate was held at 2.5%, and the reserve rate—the interest rate commercial banks receive in excess of their individual quotas at the central bank—at 0.5%. Analysis Norges Bank has gradually tightened its monetary policy stance by raising its policy rate four times since September 2018, including on three occasions in 2019—in January, June and September. The decision to hold fire on this occasion was in line with expectations, given the recent inflation figures and other indicators of future price pressures. The central bank also released its latest Monetary Policy Report, containing a particularly slight increase to the interest rate path caused by currency depreciation. Weighing up the various indicators, Norges Bank referenced that the growth of the mainland economy (excluding offshore oil, gas and shipping activities) has slowed since autumn and is a little lower than expected, with further slight decline anticipated for the first half of next year. Recent data indicate that mainland GDP growth slowed to a seasonally adjusted 0.3% (in real terms) in the three months to October, from 0.7% in the three months to September, with private consumption growth down from 0.5% to 0.2%, and exports still contracting. Labour market developments and capacity utilisation have been more subdued than expected, and inflation has moderated. The headline measure slid to 1.6% in November, and the main core measure (the consumer price index adjusted for tax changes and excluding energy products) moved in line with the 2% target. Norges Bank also forecasts only moderate wage growth. The krone has depreciated more than expected and is a main risk to the inflation outlook. By raising import prices, it implies (in isolation) a steeper interest rate path. However, Norges Bank believes that this is negated to a large extent by the more moderate upturn in the economy while also noting that trade tensions could worsen, with oil prices falling more than is assumed. Impact on the forecast Given these counterbalancing risks, and the fact core inflation is predicted to remain close to the target rate, we do not expect a further increase in the policy rate until 2021.

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102 1/17/2020 Norway profile - Timeline - BBC News

Norway profile - Timeline

19 April 2018

A chronology of key events:

Circa 800-1050 - Viking Age, in which Scandinavians go on plundering expeditions abroad. Some Norwegians settle at their destinations, including Scotland and Greenland.

Circa 900 - Norway unified into one kingdom.

1030 - Christianity adopted.

1536 - Norway becomes a dependency of Denmark.

1814-1905 - Union with Sweden.

1905 - Norwegian parliament, the Storting, proclaims independence from Sweden. Norwegian people endorse decision in plebiscite. Prince Carl of Denmark becomes King.

1913 - Universal suffrage for women introduced. Norwegian women begin to play greater role in politics.

1914 - Norway, Sweden and Denmark agree to remain neutral during World War I.

1920 - Norway joins the League of Nations.

1929 - Norway suffers considerably as a result of the world economic depression. Trade, shipping and banks all post heavy losses. The value of the krone falls. Unemployment becomes severe and lasts until the beginning of World War II in 1939.

GETTY IMAGES

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1939 - Norway declares its neutrality at the outbreak of World War II, but this position becomes increasingly difficult to maintain.

1940 - German forces invade Norway in April, attacking important ports. Resistance last for two months. The Royal Family and the government flee to Britain in June. A government-in-exile is set up in London. Vidkun Quisling proclaims himself head of government in Norway.

1941 - Quisling introduces martial law due to widespread resistance and acts of sabotage by the Norwegian people.

Recovery and prosperity

1945 - German forces in Norway surrender in May. The King returns to Norway in June. Quisling is tried and executed for treason. Norway becomes a charter member of the United Nations. Reconstruction begins, with Norway's gross national product reaching pre-war levels within three years.

GETTY IMAGES

1949 - Norway joins the North Atlantic Treaty Organisation (Nato).

1959 - Norway becomes founder member of the European Free Trade Association (Efta).

1967 - The Storting votes 136 to 13 to renew a previous Norwegian application to join the EEC.

Late 1960s - Oil and gas deposits discovered in the Norwegian sector of the North Sea.

1970s - Exploitation of oil and gas deposits begins. By the early 1980s they constitute nearly one-third of Norway's annual export earnings.

1972 - Norwegian voters reject the Labour government's recommendation on EEC membership by a margin of 6%. The government resigns. 104 https://www.bbc.com/news/world-europe-17746861 2/6 1/17/2020 Norway profile - Timeline - BBC News

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1973 - Norway signs a free trade agreement with the EEC.

1986 - International Whaling Commission imposes moratorium on whaling. Norway registers objections.

1991 - King Olaf V dies. He is succeeded by his son, Harald V.

1993 - Norway brokers peace negotiations between Israel and the Palestine Liberation Organisation, which lead to the Oslo accords.

Norway resumes commercial whaling despite international moratorium.

GETTY IMAGES

1994 - Norwegians again reject membership of the European Union in a referendum, by a margin of about 5%.

2000 - Norway begins mediation between the government of Sri Lanka and Tamil separatists. 105 https://www.bbc.com/news/world-europe-17746861 3/6 1/17/2020 Norway profile - Timeline - BBC News 2000 March - Conservative government of Kjell Magne Bondevik resigns over question of how Norway should generate its power. He is succeeded by Labour leader Jens Stoltenberg who favours gas-powered generating plants, despite Norway's strict environmental laws.

2001 January - Tens of thousands protest in Oslo against the murder of a black teenager for which three neo-Nazi youths are subsequently jailed.

Environmentalists angered by decision to lift ban on export of whale meat and blubber. Controversy deepens when government orders cull of grey wolves, an endangered species in Europe, which it accuses of causing serious damage to livestock.

2001 September - Labour government of Jens Stoltenberg suffers heavy defeat in general election in which no single party wins enough votes to form a majority government.

2001 October - Conservatives, Christian People's Party and Liberals agree to form coalition government with support from far-right Progress Party and with Kjell Magne Bondevik as prime minister.

2003 May - Discovery of high levels of chemicals in whale meat leads to pregnant women being warned not to eat it.

Arctic oil exploration

2003 December - Plans to explore for oil and gas in the Barents Sea spark criticism from environmentalists and fishing industry.

2004 June - Government intervenes to end week-long strike by oil workers seeking better pension rights and job security after employers threaten lock-out.

2005 September - PM Bondevik loses general election to centre-left alliance led by Labour Party's Jens Stoltenberg, which wins more than half of seats in parliament.

2005 October - Two Norwegian fisheries inspectors are released having been held for five days against their will on board a Russian trawler which fled while they were inspecting it for suspected illegal activity.

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GETTY IMAGES 2007 February - Constitution amended to abolish bicameral division of Storting parliament after next elections.

2009 September - Centre-left coalition of PM Jens Stoltenberg narrowly wins re-election in parliamentary elections.

2010 September - China warns that Norwegian Nobel committee's decision to award Nobel Peace Prize to jailed Chinese dissident Liu Xiaobo will harm relations between Norway and China.

Breivik jailed

2011 July - Extreme right-winger Anders Behring Breivik carries out a bomb attack and mass shooting, killing more than seventy people in the worst massacre in Norway's modern history.

2012 July - The government uses emergency powers to force offshore oil and gas workers back to work after a 16-day strike over pensions.

2012 August - A Norwegian court finds mass killer Anders Behring Breivik sane and sentences him to 21 years in jail.

2013 January - Norway and the EU reach a new agreement on fishing quotas.

2013 September - Parliamentary elections. Centre-right bloc led by Erna Solberg's Conservative party wins.

2014 May - Major General Kristin Lund from Norway becomes the first woman to command a UN peacekeeping force.

2016 January - The Lutheran Church - to which three quarters of Norwegians belong - adopts a new liturgy allowing gay couples to marry in church weddings. 2017 September - Ema Solberg claims a new mandate as prime minister following elections. 107 https://www.bbc.com/news/world-europe-17746861 5/6

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Norway > Armed Forces

Date Posted: 01-Aug-2019

Publication: Jane's Sentinel Security Assessment - Western Europe

Contents Executive summary | Threat environment | Doctrine and strategy | Military capability assessment | Joint forces interoperability | Triservice interoperability | Multinational interoperability | Defence structure | Command and control |

Executive summary Last updated: 25-Jun-2019

Total strength Army Air force Navy Marines

Active personnel 1217,000 7,800 2,900 3,800 3 100

Reserves 38,000 n/a n/a 0 0

1. Figures includes professional soldiers and conscripts (full‐time equivalent) but not civilian staff. 2. Includes the Cyber Force, Medical Force, special forces, and other departments. The Defence Logistics Organisation is largely composed by civilians. 3. Includes a 600‐strong coastguard, which is organised as part of the navy.

• Norway has a relatively small military force that relies on a mix of professional soldiers and conscripts. Although it can operate across the spectrum of force in air, sea, and land domains, it has capability shortfalls in several areas and some important assets are nearing obsolescence. Most concerning, one of the Royal Norwegian Navy’s (RNoN’s) five Fridtjof Nansen‐class frigates was seriously damaged in a collision in November 2018 and is a total loss. The RNoN’s combat capability is thus now vested in four frigates, six Skjold‐class corvettes, and six Ula‐class submarines (with patrol vessels operated by the Norwegian Coast Guard). The Royal Norwegian Air Force’s (RNoAF’s) primary combat capability is provided by 57 F‐16 combat aircraft. These have been regularly modernised but their age has made availability a challenge. The RNoAF also provides logistical support with C‐130s and maritime support with Orion P‐3 maritime patrol aircraft (MPA) and NH90 NATO frigate helicopters (although the latter are not yet fully capable). Lastly, the Norwegian Army relies on one armoured, one mechanised infantry, and one light infantry battalion. These battalions are equipped with about 50 Leopard 2 tanks and 100 CV9030 infantry fighting vehicles. However, the army has very little indirect fire capability and the tanks are nearing the end of their usable lives. • Norway in the past has made significant contributions to international operations, although its contributions as of mid‐2019 are limited. It has small land detachments deployed to Afghanistan and Iraq for operations and to Lithuania for NATO deterrence. Meanwhile, the last combat mission undertaken by

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the RNoAF was in Libya in 2011. Missions since then have focused on logistics support and air policing. That said, Norway is committed to being able to deploy up to 12 F‐16s for a limited time. Lastly, the RNoN focuses mostly on patrolling Norwegian waters, with small contributions to NATO standing groups. • The army’s light infantry battalion is to be converted to mechanised infantry by around 2021 and a 400‐ strong cavalry battalion is being established in Finnmark. Both of these moves are intended to boost conventional combat capability. However, the light infantry battalion will not be manned at a high level but instead staffed only with key personnel. The government opposition has criticised this as essentially mothballing the battalion, although the government argues it will give Brigade North increased flexibility. • The RNoN is procuring a new logistics support vessel, with delivery in late 2018 but full operational capability (FOC) not expected until 2020. Meanwhile, the Norwegian Coast Guard is fast‐tracking the acquisition of three new arctic patrol vessels to replace the Nordkapp class. Further down the road, the RNoN plans to procure four Type 212 submarines. Of note, with the loss of the frigate KNM Helge Ingstad , Norway will be looking at a way to replace the lost operational capability. In the air domain, Norway is planning to replace its F‐16s with a fleet of 52 Lockheed Martin F‐35A Lightning IIs. Initial operating capability is expected in 2019 and full operating capability in 2025. The army’s procurement plans in the near term are focused on upgrading and increasing its inventory of CV9030 vehicles. In the medium term (early 2020s) the army is rebuilding its indirect fire capability through procurement of 29 K9 155 mm self‐propelled howitzers and adding a ground‐based air defence capability. In the longer term (post‐2025), it plans to replace its Leopard 2 tanks.

Threat environment Last updated: 25-Jun-2019

Norway depends on collective security and regional and global stability to secure its interests. With this in mind, the most pressing conventional threat comes from Russia via the country’s NATO commitments. Norway has a strategic position at Russia’s pathway to the North Atlantic. Norwegian security is also indirectly impacted by general conflict and instability (complex emergencies). Lastly, the changes being brought about by global warming are leading to a range of security challenges in the Arctic.

Doctrine and strategy Last updated: 25-Jun-2019

Norway historically placed significant emphasis on its territorial defence capabilities. Despite the demise of the Soviet Union and the low likelihood of a Russian invasion from the north, territorial defence remains at least the notional justification for procurement and policy decisions. Norwegian defence doctrine mandates that the armed forces must maintain an ability to respond to the early phases of a conflict independently to provide NATO allies time to come to the country’s aid.

As the Norwegian defence forces would be outnumbered by Russian Armed Forces in the event of an open conflict, the main strategy would be to fight a defensive battle. The plan rests upon the fact that the terrain in Norway is well‐suited for defensive operations, with large parts of the country being heavily mountainous and featuring a relatively limited road network.

The tasks of the Norwegian Armed Forces are

• Ensure credible deterrence based on NATO’s collective defence • Defend Norway and allies against threats, aggression, and attacks within the framework of NATO’s collective defence • Prevent and manage incidents and security crises, including the facilitation of allied support • Ensure a national basis for decision making through surveillance and intelligence

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• Safeguard Norwegian sovereignty and sovereign rights • Exercise Norwegian authority in designated areas • Participate in multinational crisis management, including peace operations • Contribute to international security and defence co‐operation • Contribute to societal security and other key societal tasks

Military capability assessment Last updated: 25-Jun-2019

• Norway does not have a niche army, but instead maintains a wide range of independent capabilities. It can thus carry out most military tasks and contribute to almost any multinational operation. However, none of Norway’s military capabilities are based on large weapon inventories and so they have limited bandwidth. In addition, due to budget constraints and competing priorities, the army has lost some high‐intensity capabilities. For example, it 1745980 has removed its multiple launch rocket systems from service and vastly Norway reduced its artillery holdings. capability • The Norwegian Army does still have a relatively large fleet of armoured assessment (IHS vehicles relative to its size, with the core of the fleet being 54 Leopard 2 tanks Markit) and 103 CV90 armoured fighting vehicles. The CV90 fleet is being boosted to 144 vehicles over the next few years to further increase force mobility. At the same time, existing CV90s are being upgraded. The army also has about 100 Iveco light multirole vehicles that are well‐suited for expeditionary operations. • The RNoAF’s primary combat capability is provided by 57 F‐16 fighters. Armament options include beyond‐visual‐range air‐to‐air missiles and precision‐guided air‐to‐surface munitions. However, Norway’s F‐16 fleet is quite old and this places limits on the air force’s ability to sustain contributions to international missions. Norway is to replace its F‐16s with 52 Lockheed Martin F‐35A Lightning IIs, the first of which have been delivered. • The RNoAF has a modest logistics capability provided by C‐130 transports and flies P‐3 Orion MPA and NH90 helicopters for maritime tasks. Delivery of the NH90s is ongoing and FOC is not expected until 2022. Until then, patrol and anti‐submarine capabilities will remain limited. Lastly, the RNoAF operates Norway’s only ground‐based air defence system (this will change in the early 2020s when the army gets its own systems). • The RNoN is in the final stages of a significant recapitalisation programme that has given it a modern surface fleet. This has involved swapping its small frigates and fast attack craft for fewer but larger, more stable, and more flexible vessels that are able to sail in blue waters. The RNoN fleet is spearheaded by four new 5,290‐tonne Fridtjof Nansen‐class frigates. The Fridtjof Nansen frigates have modern anti‐air, anti‐submarine, and anti‐ surface weapons, although land attack capabilities are very limited. Of note, a fifth frigate (KNM Helge Ingstad) was seriously damaged in a collision in November 2018 and is a total loss. This is a significant loss in anti‐surface, anti‐air, and anti‐submarine warfare capability. • In addition to the frigates, Norway has six Ula‐class submarines, six Skjold‐ class corvettes, three Oksøy‐class minehunters, three Alta‐class minesweepers, and a surveillance ship. The Norwegian Coast Guard, which is under the command of the RNoN, provides additional capabilities, especially in the Arctic waters. The RNoN has also received its new logistics

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support vessel, with FOC expected in late 2020. This is one of the final pieces required for the RNoN to round out its expeditionary force.

Joint forces interoperability

Triservice interoperability Last updated: 25-Jun-2019

The Norwegian Armed Forces have undergone significant reforms and, along with this, have introduced measures to improve interoperability. Norway has, for instance, abandoned all service‐specific operational headquarters (HQ) and instead operates a joint HQ in Bodø. The military also has a single triservice logistics and purchasing organisation. These efforts have improved Norwegian joint operational capability. Norway also holds key exercises in a joint manner, which has been identified as providing better training value compared to traditional single‐service ones.

Multinational interoperability Last updated: 25-Jun-2019

Multinational interoperability is a core requirement for the Norwegian Armed Forces and strongly influences procurement and policy decisions. To improve its interoperability, Norway has acquired new personal radios for its infantry as well as new long‐range communications for its naval vessels, enabling them to sustain operations in foreign theatres as part of larger naval task forces. The air force has also put great emphasis on interoperability, particularly with the United States, a concern that is believed to have weighed heavily in Norway’s F‐16 replacement decision. Link 16 is used by all three services. Interoperability with non‐NATO partners Finland and Sweden is largely handled through NATO standards, though there are also unique aspects. Norway also frequently holds multinational and NATO exercises on Norwegian territory, where it is a priority to have allies present in order to further develop interoperability and enhance the familiarity of these allies to Norwegian operational conditions.

Defence structure Last updated: 25-Jun-2019

The Norwegian Armed Forces include the Norwegian Army, RNoN, and RNoAF. The navy includes the coastguard and air force includes a search‐and‐rescue (SAR) squadron, although the overall responsibility for SAR falls to the Ministry of Justice. Norway also has a home guard that acts as a reserve territorial defence force.

Other organisations under the Ministry of Defence include the Defence Staff, which co‐ordinates and implement plans and budgets; the Joint Operational HQ, which plans and executes military operation domestically and abroad; the Intelligence Service; Special Operations Command; the Cyber Force; the Defence Logistics Organisation, which executes procurement plans and is composed of civilians; the Norwegian Defence University College; the HR and Conscription Centre; the Joint Support Services; and the Joint Medical Services.

Command and control Last updated: 25-Jun-2019

Commander‐in‐Chief of the Armed Forces: King Harald V

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Minister of Defence: Frank Bakke‐Jensen

Chief of Defence: Admiral Haakon Bruun‐Hanssen

Chief of Defence Staff: Lieutenant General Erik Gustavson

Commander, Joint Operational Headquarters: Lieutenant General Rune Jakobsen

Chief of the Army: Major General Odin Johannessen

Chief of the Royal Norwegian Navy: Rear Admiral Nils‐Andreas Stensønes

Chief of the Royal Norwegian Air Force: Major General Tonje Skinnarland

Chief of the Home Guard: Major General Eirik Kristoffersen

Head of the Norwegian Special Operations Command: Major General Torgeir Gråtrud

According to the Norwegian constitution its political system is a constitutional monarchy. The king is formally the commander‐in‐chief of the armed forces, but this authority is, in practice, delegated to the executive branch of the government.

The government is the highest executive authority responsible for military and civil preparedness in peacetime and for the command of all aspects of national defence in time of war. That said, military command authority is delegated to military commanders, appointed by the executive branch.

The chief of defence, who is the highest‐ranking military officer, has full command of Norwegian defence in peacetime. Although the minister of defence may instruct chief of defence on operational matters, such authority is rarely, if ever exercised. Thus, the chief of defence can act with broad latitude in carrying out the policies set forth by the government. In time of war, the chief of defence continues to be the government’s closest military adviser, while the command authority is assumed to be transferred to NATO’s Integrated Command Structure.

Subordinate to the chief of defence are the HQ of the armed forces. While the individual services are responsible for recruiting and training their own forces, the Joint Operational HQ is in charge of all operations at home and abroad.

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