Boston, MA -- (SBWIRE) -- 02/15/2013 -- Core Views

Our view for a sharp decline in economic activity in 2012, owing to both domestic and external factors, has played out, with real GDP growth slowing to 2.9% in the second quarter. We expect growth to bottom out at current levels, with continued evidence of a rebalancing away from an overreliance on domestic demand towards a greater focus on exports, at least over the next couple of quarters. With relatively healthy budget and debt dynamics, the government is in a position to provide a more pronounced fiscal boost to the economy if needed, although we expect fiscal discipline to remain high up on the government's agenda.

Turkey's external imbalances have continued to correct, with the current account deficit narrowing on the back of tighter monetary policy and weaker energy prices. We expect this process to continue in 2013, but at a more gradual pace. We therefore remain wary of Turkey's reliance on short-term foreign capital inflows and energy imports. On the monetary policy front, we expect diminishing demandside inflationary pressure to allow the central bank increasing room for monetary easing.

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Turkish authorities have thus far successfully steered the domestic economy away from a hard landing, but 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, particularly as the Kurdish minority issue remains a major sticking point between the Justice and Development Party and the Peace and Democracy Party. Moreover, Turkey faces a challenging foreign policy environment as the government attempts to cement its role as an economic and political power in the region.

Major Forecast Changes

We have revised down our 2013 and 2014 real GDP forecasts for Turkey on the back of weakening leading indicators and revelations that exports may not have been as strong in 2012 as the headline reading suggests. We now expect growth of 4.3% and 4.7% in 2013 and 2014 respectively, compared to our previous forecasts of 4.7% and 5.4%. Nevertheless, if the Turkish authorities are able to weather the rebalancing process over the next few quarters, the country's long-term growth story remains an attractive one.

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