The Turkish economy and the lira are being weighed on by declining tourist arrivals and increasing oil price in the long term. The current account is in deficit again and is broadening. The real sector and consumer sentiment recovered, which underpinned strong March and April data. However, growth in industrial output is decelerating. Recurrence of the upside economic surprises seen in 2015 are at risk as fixed investment and private consumption growth might further slow down due to wobbly sentiment and weakening lira.

But the central bank’s easing of monetary policy is likely to support economic growth in 2017, noted Danske Bank in a research report. The Turkish economy is expected to expand 2.7% y/y in 2016, added Danske Bank.

“As the political uncertainty may lead to the president strengthening his grip on the economy and worsen sentiment, we cut our 2017 GDP outlook to 3.0% y/y from 3.5% y/y while consensus stays at 3.5% y/y”, said Danske Bank.

Meanwhile, the political disturbance has resulted in the lira’s biggest depreciation in six years. In the last 30 days, the TRY has been the worst performing currency amongst the EM currencies. It depreciated 4.3% against the USD in spot returns.

With the heightened political uncertainty, ambiguity on the future government’s promise to execute structural reforms and a threat of increased pressure on the central bank, the USD/TRY forecasts to 3.05 in 3M, 3.10 in 6M and 3.12 in 12M, according to Danske Bank. The USD/TRY forecasts faces downside risk as strong macro fundamentals and the US Fed delaying rate hikes might alleviate the pressure on the Turkish lira.