Turkey

After robust growth through Q1 2016, the expansion has slowed. Growth is projected at 2.7 percent in 2016 and 2.9 percent in 2017 with considerable downward risks. Domestic consumption is the main growth driver, supported by a large increase in public expenditure and a hike in the minimum wage. However, political uncertainty, weakened corporate profitability, anemic credit growth, and a sharp fall in tourism have taken a toll on investment and net exports. The monetary stance and macro prudential measures were loosened, but credit growth continues to slow. A negative output gap is opening, but sticky expectations are keeping inflation above target. External imbalances persist: the current account deficit remains large and the NIIP is projected to become more negative. External financing conditions were favorable in the first semester, helping the rollover of large financing needs and supporting the Lira. However, political uncertainty after the failed coup attempt and a less favorable external environment are weakening the Lira and increasing the cost of external financing.