The EBRD has slashed its 2014 GDP growth forecast for Turkey to 2.5% from a previous 3.3%.

The higher cost of finance, alongside the introduction of legislation curtailing credit card spending, is expected to constrain private consumption and investment activity, and weigh on growth in 2014, according to the EBRD’s latest Regional Economic Prospects-May report. The EBRD expects growth to recover somewhat in 2015 to 3.2% on the back of favourable base effect, opening up the space for monetary easing, and somewhat elevated business and consumer confidence resulting in higher contribution of consumption and investment.

The major downside risk is that Fed’s tapering weighs on the flow of foreign funds to the emerging markets more than expected, where Turkey might take the brunt of the drain in short term capital flows, with its still large external imbalances mainly financed through this channel, the EBRD said. But on a positive side, the EBRD added, the economy proved resilient to unfavourable circumstances in 2013, with still positive net portfolio inflows, and continuing access to international markets for both public and private sectors, albeit with higher interest rates.

The EBRD does not expect large impact of the Russia/Ukraine crisis on growth outlook in Turkey, but it still warns that a further deepening of the crisis, especially if it pushes up the price of oil, would pose a downside risk. The inflationary pressures will likely keep interest rates, and thus the cost of finance, high throughout 2014, according to the EBRD.