ANKARA — The World Bank cut its growth forecasts for Turkey on Wednesday as uncertainty over who will govern exacerbated the country's economic weaknesses and vulnerability to global liquidity tightening. Parliamentary elections on June 7 failed to give any party a clear majority, plunging the lira to record lows against the dollar. The AK Party, which lost its single-party rule for the first time since coming to power in 2002, is now looking for a junior partner to form a coalition government. Since the election, foreign investors' bond portfolios have fallen $1.7 billion, based on central bank figures, as investors fret that an unstable government would be unable to deliver the structural reforms needed to revive growth. “It's becoming apparent that whoever is in government needs to make some large structural reforms to boost growth. Without a stable government, it would be very hard to push those reforms,” said William Jackson of Capital Economics in London. The World Bank said in a note the uncertain political outlook and a gradually tightening global financial environment had prompted it to cut Turkey's 2016 and 2017 growth forecasts to 3.5 percent. Although it kept its 3 percent forecast for 2015, it said political uncertainty created downside risks. Some think the uncertainty may prove temporary. “Political uncertainty is clearly an economic liability. But a sustainable coalition that helps Turkey achieve some political equilibrium is a real possibility,” said Michael Harris, Turkish strategist at Renaissance Capital. A simple message about the independence of the central bank could prove enough to turn the election into an asset for the economy. President Tayyip Erdogan and senior AK Party officials have in the past exerted political pressure on the bank to persuade it to lower interest rates and boost economic growth. The new policy makers will be contending with an already downward trend in its growth. Despite falling growth, core inflation remained stubbornly high. Manik Narain, head of Europe Middle East and Africa strategy at UBS, said a mismatch between high credit growth and sluggish private investment growth in recent years was a key signal of a deteriorating outlook. “There are reasons to believe that the Turkey trend growth had been slowing down before the onset of political uncertainty,” he said. Turkey is especially sensitive to global liquidity conditions and in particular speculation over the looming US Federal Reserve rate hike, because it must finance its large current account deficit with foreign capital inflows. The Fed is on track to raise rates for the first time in nearly a decade in September, according to a Reuters poll that suggests economists now are mostly confident about that timing. The hike would make US assets more attractive in comparison to Turkish and other emerging market investments. “With the Fed likely to tighten this year, if that causes any market shocks, Turkey would be first in the firing line,” Jackson said. 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. — Reuters
