World Bank Cuts Turkey’S 2016-2017 Growth Forecasts Over Political Outlook

- The World Bank has said it would stick to its 3 percent growth forecast for Turkey this year, but cut its 2016 and 2017 growth forecasts to 3.5 percent, citing the uncertain political outlook after the June 7 parliamentary elections, in a brief note on July 1.

The brief confirmed that 2015’s growth forecast will remain at 3 percent, with the current account deficit falling to 4.6 percent of the GDP. Under the assumption that further pressure on the exchange rate can be contained, 12-month inflation is likely to decline to 7 percent by December 2015, the note added.

“The forecast for 2016 and 2017 is downgraded to 3.5 percent for both years, from 3.9 and 3.7 percent respectively, against the backdrop of an uncertain domestic political outlook and a gradually tightening global financial environment” the bank said.

“Restoring investor confidence is the key to growth over the short to medium term. There is an urgent need for a stable, inclusive government” the bank noted, adding that a reimplementation of the previous structural reform agenda was needed to restore investor confidence.

According to the brief, short-term financial inflows significantly slowed due to election uncertainty, while long-term inflows remained strong. Particularly, as the risk premium increased, nonresidents sold portfolio assets. However, net errors and omissions showed an inflow of $7.8 billion. This, together with a drawdown of foreign exchange reserves by $5.7 billion, financed most of the current account deficit, according to the bank.

As the expected Fed lift-off will lower the carry trade returns and likely pressure emerging market currencies, the Central Bank will have limited room for an accommodative monetary policy whilst maintaining financial stability, said the bank.

The brief noted that growth remained resilient in the first quarter, thanks to public spending and lower imports. Likewise, job creation recovered in the first quarter, driven by services and industry. The stronger-than-expected growth in the first quarter was balanced by the country’s current uncertain political environment, according to the bank.

“Turkey`s current account deficit has narrowed since January, thanks to gold exports. However, the gold adjusted deficit, a more accurate measure of external demand, deteriorated due to persistent weakness in Turkey’s trading partners” the bank said.