Today: February 14, 2016, 3:50 pm

Turkey ecomonic growth to be stifled by rising domestic interest rates in 2014
Turkey Business Forecast Report Q1 2014 - a new country guide report on 2014-03-17 07:27:02
Although we view positively Turkey´s long-term growth potential, our real GDP growth forecasts remain well below consensus in 2014 and 2015. Rising domestic interest rates, in line with developed state yields, will stifle credit growth, an important driver of the Turkish economy.

With relatively healthy budget and debt dynamics, the government is in a position to provide a more pronounced fiscal boost to the economy. However, we expect fiscal discipline to remain relatively high on the government´s agenda, with monetary policy playing a more active role in supporting growth.

While the government´s debt load is low by regional standards, the private sector´s rampant external borrowing in previous years has greatly increased macroeconomic risks.

After substantial widening of external imbalances in 2013, we expect Turkey´s current account deficit to narrow only gradually in coming years due to its dependence on imported energy. Turkey will remain reliant on short-term foreign capital inflows to cover the sizeable current account shortfall, leaving it prone to shifts in international risk sentiment and leaving open the potential for financing crises.

Recent protests have highlighted the fact that major political challenges still face the country over the medium term. In particular, the government will struggle to secure a multi-party consensus on the process of writing a new constitution, and the ruling Justice and Development Party will face growing and more vocal public opposition, with the potential for further unrest. Moreover, Turkey faces a challenging foreign policy environment amidst heightened regional tensions as the government attempts to cement its role as an economic and political power in the region.

We have revised down our 2014 real GDP forecasts for Turkey on the back of tightening monetary conditions and our expectation for a less amenable global environment for emerging market growth. We now expect growth of 2.6% in 2014 from 3.1% previously. Nevertheless, if the Turkish authorities are able to weather the rebalancing process and challenging external financing environment over the next few quarters, the country´s long-term growth story remains an attractive one.

The major risk to Turkey´s macroeconomic trajectory stems from its external financing requirement. Turkey´s large current account deficit and dearth of foreign direct investment inflows leaves the country vulnerable to external shocks and a major outflow of foreign capital. As such, while we see potential upside risks to our short-term forecasts should global risk appetite and demand for emerging market assets show a robust recovery, we believe risks are weighted primarily to the downside.

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