The World Bank cut its 2016 and 2017 growth forecasts for Turkey to 3.5 percent due to the political uncertainty and gradually tightening global financial environment. The bank has kept its growth forecast at 3 percent for this year.Turkey posted stronger-than-expected growth in the first quarter, according to the World Bank, as healthy public spending and strong job creation boosted the economy. But the forecasts for 2016 and 2017 were downgraded to 3.5 percent for both years, from 3.9 percent and 3.7 percent, respectively.The June 7 general elections ended 13 years of single-party government rule. Despite receiving the largest share of the votes, the ruling Justice and Development Party (AK Party) lost its majority in Parliament. Three weeks after the elections, there is still no clear sign of a coalition government since all parties have different priorities.Pointing to this political environment, the World Bank said in a note that the 3 percent growth forecast for 2015 is still valid with the current account deficit falling to 4.6 percent of gross domestic product (GDP); however, political uncertainty has created downside risks for the country's economy. The Turkish lira hit a record low the day after the elections, and it remains under pressure, as coalition talks worry investors."Restoring investor confidence is the key to growth over the short- to medium-term. There is an urgent need for a stable, inclusive government and the return to implementation of the structural reform agenda to restore investor confidence," the bank warned.
The bank estimated that if further pressure on the exchange rate can be contained, 12-month inflation is likely to decline below 7 percent by the end of the year. But Turkey's current account deficit is likely to remain high, even though it was reduced in the first quarter by exceptional gold exports. This indicated real deterioration contrary to the nominal improvement seen on the current account since the start of the year. The expected rise of U.S. interest rates later this year will also pressure all emerging market currencies, and the Central Bank of the Republic of Turkey (CBRT) would have limited room for accommodative monetary policy while maintaining financial stability.The World Bank said it expects the current account deficit to fall to 4.6 percent of GDP in 2015 from 5.8 percent in 2014 before rising again to 5.1 percent in 2016. The effect of the increase in oil prices since January being enhanced by devaluation in the currency and the relief brought by the decline in food prices in May were stated in the notice, which includes remarks on 2015's harvest having a positive effect on the high food prices of 2014 that lasted through the spring months due to poor weather conditions. The notice also forecasted a decline in inflation in food prices thanks to suitable weather conditions and a better harvest.