Turkey: Sturdier than thought

The positive Constitutional Court ruling for the government and the AKP removes considerable uncertainty from the country. The economy will benefit from this. Other challenges remain, e.g. the international capital markets have hit choppy waters in the wake of the subprime crisis in the US. How will Turkey accomplish the balancing act between the tricky domestic political situation and the confidence of international investors upon which it relies given its substantial foreign capital requirements?

Economic developments in Turkey long resembled a rollercoaster ride, with years of booming economic activity usually ending in a steep downturn, often coupled with a sharp slide in the currency and hefty knocks to prosperity. This has changed fundamentally since the crisis of 2001, helped crucially by the stable political situation that facilitated sweeping reforms. The chronically deep-red public finances were sorted out, the exchange rate was floated, the central bank made independent, inflation was drastically reduced and the banking system strengthened by reining in political meddling. This has since fed through into persistent high growth rates.

But risks remain, above all against the backdrop of the present challenges on the domestic political front and in the global economic environment. Financing the yawning current account deficit is getting more difficult and a potential exchange rate correction would hit the business sector, with its massive open foreign currency positions, particularly hard. Although a hard landing cannot be ruled out completely – which however would be by no means comparable with a financial crisis on the scale seen in 2001 – we deem a moderate slowdown in growth the most likely scenario, triggered by lower capital inflows and a concomitant correction of the high current account deficit. Over the medium term we are still upbeat about Turkey’s economic outlook.

Our report “Turkey: Sturdier than thought”, which looks at the individual issues more closely, can be downloaded from the internet at: Allianz Economic Research under “Working Papers”.

Christiane Seyffart,

tel.: 49 / 69 / 2 63 – 1 13 48

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