By Ercan Gurses
ANKARA (Reuters) - Turkish economic growth would take a hit if talks to form a coalition government fail and a new election is called, Finance Minister Mehmet Simsek said on Wednesday, warning that the uncertainty risked delaying private investment.
The ruling AK Party lost its majority for the first time in a parliamentary election on June 7, forcing it to seek a junior coalition partner or face a re-run, and plunging Turkey into political instability not seen since the 1990s.
Markets have been unnerved by the developments, with the lira some 11 percent weaker against the dollar so far this year, one of the biggest losers among emerging market currencies. It was 0.4 percent weaker by 1156 GMT, easing after a rally on Tuesday on optimism over Iran's nuclear deal.
Coalition talks between the AKP and opposition parties entered a third day on Wednesday. They have until late August to agree on a working government or President Tayyip Erdogan could call a new election, an option he is seen favouring as a chance for the AKP to win back a majority.
"Everyone wants Turkey to have a strong coalition government," Simsek told a news conference in Ankara while announcing June budget developments.
"Having an election again is of course a negative scenario, because another election means in a sense facing uncertainty through virtually the whole of 2015," he said.
In the weeks after the election, foreign investors' bond portfolios fell $1.7 billion based on central bank figures, as investors fretted that an unstable government would be unable to deliver the structural reforms needed to revive growth.
Business leaders and economists forecast growth this year at 3.0 percent, the central bank's latest monthly survey of their expectations showed, down from 3.1 percent a month ago.
The World Bank cut its growth forecasts for Turkey this month as the uncertainty exacerbated structural weaknesses and vulnerability to global liquidity tightening. Though it kept its 3 percent forecast for 2015, it warned of downside risks, and cut its 2016 and 2017 growth forecasts to 3.5 percent.
HEALTHY FINANCES, UNEMPLOYMENT FALLS
High credit growth but sluggish gains in private investment are one of the key challenges for the slowing Turkish economy, and Simsek warned that if the political impasse drags on private investment could slow down.
Growth in the first quarter came in at 2.3 percent, and economy officials have said they expect growth of 2.0-2.5 percent this year, below a government target of 4 percent.
But Turkey's fiscal position remains a bright spot, with the budget showing a surplus of 3.2 billion lira ($1.2 billion) in June, a position Simsek said had been helped by a 15.8 percent rise in tax revenues in the first half.
The unemployment rate was also in single digits for the first time since July last year, data for the three months from March to May showed.
Seasonally adjusted, the number of people employed rose by 101,000 during the period, apparently boosted by an employment and investment package announced in April by Prime Minister Ahmet Davutoglu, who vowed it would create 120,000 new jobs.
But youth unemployment rose to 17.0 percent from 15.5 percent a year earlier, while the total number of unemployed rose to 2.821 million from 2.579 million the previous year.
Inflation was likely to continue its fall in 2015 if oil prices remain low and a normalisation in food prices continues, Simsek said. The central bank survey echoed his optimism, with business leaders now expecting year-end inflation of 7.71 percent, down slightly from a 7.77 percent forecast a month ago.
Simsek also welcomed Iran's nuclear deal with world powers, saying it could reduce geopolitical tensions and help keep oil prices at a level beneficial to Turkey.
(Writing by Nick Tattersall; Editing by Daren Butler and Hugh Lawson)
