Boston, MA -- (SBWIRE) -- 05/05/2014 -- Although we believe Turkey has strong long-term growth potential, our real GDP growth forecasts remain well below consensus in 2014 and 2015. Tightening global liquidity conditions and rising domestic interest rates will stifle investment and credit growth, an important driver of the Turkish economy.

Political instability and social tensions will remain elevated in the run-up to general elections in 2015, further weighing on business and consumer confidence.

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.

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.

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

A major corruption scandal and increased incidences of popular protest have highlighted the fact that major political challenges still face the country over the medium term. In particular, the ruling Justice and Development Party will take an increasingly unilateral approach as it struggles to maintain support. We expect the party to face growing and more vocal public opposition, with the potential for further unrest. Moreover, Turkey faces a challenging foreign policy environment amid 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 real GDP forecast 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 1.5% in 2014, from a previous forecast of 2.6%. Nevertheless, if the Turkish authorities are able to weather the rebalancing process and the challenging external financing environment over the next few quarters, the country's long-term growth story remains an attractive one.

We now expect the general government budget deficit to come in at 2.7% of GDP in 2014, from a previous forecast of 2.2%, based on a deteriorating short-term growth outlook and our expectation that the government will look to support economic growth in the run-up to crucial elections in 2014 and 2015.

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