Political and security developments likely to determine economic recovery in Turkey: Fitch report

International rating agency Fitch said it expected a modest economic recovery for Turkey in 2017, noting that political and security developments were likely to determine the pace of any revival in consumption and investment.

Fitch forecasted Turkey’s growth to be at an average of 2.6 percent in 2017 and 2018, compared with an average of 7.1 percent over the last five years, ending in 2015. Growth rates have been revised up substantially between 2011 and 2015, mainly due to the under-recording of residential construction.

Consumption and exchange rate-driven import compression, and a modest improvement in exports, will support net trade while consumer confidence remains fragile, said Fitch in its latest global economic outlook.

“Political and security developments are likely to determine the pace of any revival in consumption and investment,” said the agency, adding that such developments had a significant impact on Turkey’s growth in 2016.

Since falling sharply in the two months to mid-January, the Turkish Lira has recovered ground due to a shift in investor sentiment and tighter monetary policy, Fitch added.

Some policy rates – although not the headline one – were hiked at a Monetary Policy Committee meeting on Jan. 24, and with the country’s central bank changing its allocation of funds to force banks to use more penal rates, the effective cost of funding went up by 200bp this year.

Fitch said it still expects a hike in the one-week repo rate, though the simplification of the monetary policy framework now appears to be on the backburner.

The Turkish lira is still well below its level of a year earlier, which combined with a rebound in food prices, higher oil prices and base effects is forecasted to push inflation temporarily into double digits for the first time since 2012, it added.

“Weak economic activity and a lessening impact from wage pressures and administered price adjustments will pull inflation down later in the year, although the target [6.5 percent by the end of 2017] again appears out of reach” Fitch said.