Turkey Country Risk Report Q4 2018
The Turkish economy looks set for a sharp slowdown, as rising inflation and a more restrictive domestic and external financing backdrop prove headwinds to growth.
As inflationary pressures remain elevated, businesses will see profit margins squeezed and domestic demand growth will fade over the coming quarters.
The current account and budget deficits will be reduced as the economy reduces its dependence on external financing.
Public debt will likely rise over the coming years, as the government is forced to take on private sector and state-owned enterprise debt.
Following the June 2018 presidential and parliamentary elections, President Recep Tayyip Erdoğan will have more control over Turkey's institutions and the management of the economy.
Turkish nationalism and anti-American sentiment will become more prominent, as Turkey moves further from the secular vision of the Republic's founder, Mustafa Kemal Ataturk.
Turkey's relations with traditional Western allies will continue to deteriorate in the years ahead, as the former drifts in an increasingly independent direction. In particular, tensions with the US will remain high, given a number of disputes.
The major risk to Turkey's macroeconomic trajectory in the coming years stems from its large external financing requirement. Turkey's large current account deficit and dearth of foreign direct investment inflows leaves the country vulnerable to external shocks and a major outflow of foreign capital, which becomes more likely as the US Federal Reserve continues a tightening cycle.
The Turkish lira remains vulnerable and further political or economic shocks could lead to a further sell-off in the unit, raising external financing costs higher.
A deterioration in Turkey-US relations could see harsher sanctions imposed on Turkey and Turkey's NATO membership in doubt.
The banking sector will face rising non-performing loans and may face reduced capital buffers and higher funding costs.
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