Why Turkey’s current account deficit matters « istanbul notes

Why Turkey’s current account deficit matters « istanbul notes

If the tap providing overseas capital were turned off, a chain reaction would be set in motion. The value of Turkey’s currency would fall, reflecting the fact that a reduced level of global capital would now be chasing Turkey’s lira-denominated assets. This would prompt a return to accelerating inflation, because imports would now cost more to buy with a depreciating lira. This in turn would prompt a round of interest-rate increases by the authorities in an effort to bring prices back under control. And these higher interest rates would lead to a sharp slowdown in economic activity.

This process would move the current account swiftly back towards balance. But the price paid would be economic instability of a sort that hasn’t been seen here in a decade. That would be bad news for the AKP, which has benefited greatly from the fact that its time in power has thus far been one of almost uninterrupted economic stability.

Published: June 18 2011

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