Recent official figures from Turkish central bank, and estimates from international financial institutions indicate that one of the biggest emerging economies could be on the verge of a sharp downturn.
After more than six years of steady high growth of gross domestic product (GDP) at around seven per cent in average, the economy is expected to grow by mere four per cent this year.
Though this is still high by European standards, it is far less than expected growth rates in other emerging economies around the globe.
Current account deficit seems to be the main feature of the downturn, as central bank said a few days ago that it rose more than 50 per cent year-on-year to $4.882 billion (Dh17.93bn) in April. Some Turkish analysts are expecting the deficit to reach seven per cent of GDP this year.
Turkey is a major energy importer and as oil prices stay high, the current account gap (imports exceeding the exports) is expected to end the year close to $50bn, compared with $38bn in 2007.
In a report this week, Standard and Poor's (S&P) concluded that "deterioration in the outlook for Turkey's external finances was the main reason for revision on the Republic of Turkey's ratings to negative from stable in April 2008."
The report, titled Evolution of Turkey's External Balances Reinforces Negative Outlook On Sovereign Ratings, examines how recent trends reinforce the likelihood of a prolonged deterioration in Turkey's financing conditions.
"Since mid-2007, there has been a sharp drop in the extent to which foreign investors are financing Turkey's large current account deficit" S&P's credit analyst Ben Faulks said.
"Although inflows into equity markets have remained fairly robust and Foreign Direct Investment (FDI) inflows have moderated only modestly since the beginning of 2007, flows into the domestic debt market have been dropping sharply since mid-2007," he said. Many factors are leading to this bleak outlook, some of which are global while others are internal. Global credit crunch and financial markets' jitters are having a significant impact on Turkish economy, heavily reliant on it. Rising energy and food prices are raising the cost of imports and feeding inflationary pressures into the economy. Inflation rate is now at double digits.
Political uncertainty after the court decision against the ruling AK Party of Prime Minister Recep Tayyip Erdogan is not helping investment environment. Also government's reluctance to extend an IMF deal that expired last month is shaking investor's confidence.
S&P report says that the overall balance of payments remained steady in Turkey despite the sharp outflow from domestic debt markets, as Turkish corporate bodies continue to step up their reliance on foreign borrowing, which rose sharply to reach a massive $28bn in the year to April 2008.
Mr Faulks said: "Perhaps the greatest risk arising from Turkey's increased reliance on corporate borrowing is in terms of the stability of such financing. Unlike FDI, for example, corporate borrowing is subject to rollover risk and the extent to which foreign lenders will be able and willing to continue providing such finance given the global liquidity environment and rising political uncertainties remains to be seen."
Turkey is the 17th largest economy of the world and sixth in Europe and reported a GDP of more than $400bn last year.
AKP government has been active in a reform program, under IMF auspices that witnessed a big wave of privatisation, mainly in the financial sector.
But the problem, as an Istanbul-based Turkish economist said, is that a significant part of GDP growth is through Mergers and Acquisitions (M&A) rather than FDI.
With widening current account gap, Turkey will need at least $135bn in foreign inflows to plug the gap. As global credit crunch is not yet over and investors are factoring in more risks, it might be difficult for Turkey to procure this money especially with political uncertainty in the country.