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Boston, MA -- (SBWire) -- 10/29/2013 --We expect economic growth to accelerate modestly in 2014 and 2015, although our forecasts are well below consensus. A loss of investor confidence following recent social unrest and global financial market turmoil will slow capital inflows and cap the potential growth of Turkey's credit and consumption-driven growth model. 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.

After substantial widening of external imbalances in 2013, we expect Turkey's current account deficit to narrow only gradually in coming years. 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.

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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.

Major Forecast Changes

We have revised down our 2014 and 2015 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 3.1% and 3.4% in 2014 and 2015 respectively, from 4.2% and 4.8% 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.

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