“The recent geopolitical developments have increased domestic uncertainty and weakened business confidence” said Johannes Zutt, World Bank Country Director for Turkey.
“We project GDP growth to rebound to 3.5 percent in 2017, as the removal of Russian sanctions enables net exports to improve. That said, private investment is likely to remain weak in 2017, though structural reforms aiming to rebuild business confidence and improve the investment climate should gradually help to raise private investment in the medium-term” he added.
“The current account deficit is likely to rise in 2016, as tourism revenues fall” said Donato De Rosa, World Bank Lead Economist for Turkey.
“Foreign arrivals to Turkey dropped sharply in 2016 on the back of Russian sanctions and security concerns, which curbed flows from Russia and Europe. The rebound of global oil prices since early Q1 will show its negative impact with a lag, increasing the energy deficit in 2017” added De Rosa.
The note underlines that volatility in financial markets has increased due to global and domestic factors.
“Since September, volatility has increased further, reflecting a weak global outlook, an expected interest rate increase in the United States, slower domestic growth, a widening external deficit, and an accommodative macro policy mix. Moreover, in late September, Moody`s cut Turkey`s credit rating from Baa3 to Ba1, one notch below investment grade. As a result, Turkey has seen portfolio outflows, and the Turkish Lira has come under pressure,” stated Ayberk Yılmaz, Economist in Turkey office of the World Bank.
“More recently, the surprising outcome of the U.S. presidential election has pushed up global bond yields and put emerging market currencies under pressure. The depreciation of the Lira puts additional strain on the balance sheets of corporates, which have large open FX positions, weighing on confidence and investment outlook,” he added.
The note also underlines that the government plans to ease fiscal policy in the fourth quarter to support growth amid weakening private demand. The medium-term program anticipates a looser fiscal policy going forward, using fiscal space to support growth. General government budget deficit is projected to increase to 2.1 percent in 2016, before easing to 1.9 percent in 2017.
The World Bank’s work in Turkey is based on a joint Country Partnership Strategy (CPS) for the period 2012-2016. The CPS aims to support Turkey’s transition to high income with financing of up to $6.45 billion during the five-year period, as well as with policy analysis and advisory services.