Managing Director & Senior Partner
The framework of a two-speed economy is becoming antiquated in a world of accelerating change and increasing complexity. But to speak of a “multispeed economy” is not especially helpful either. Instead, it is better to think of a mosaic, with hotspots of opportunity and black spots of no growth or slow growth. This commentary is part of our From Emerging to Diverging Markets series, which tracks these hotspots and the changes under way in the world's rapidly developing economies.
The recent volatility in the Turkish economy can mainly be attributed to concerns about the U.S. Federal Reserve's phasing out of quantitative easing. Even though Turkey’s current-account deficit has been declining, it is still relatively large at 5.7 percent of GDP as of 2012. Turkey finances most of this deficit with foreign-capital inflows in the form of portfolio investments and short-term loans, so talk about Fed policy changes resulted in worries about Turkey's ability to continue financing its deficit.
Turkey's main challenge, therefore, is to further reduce its current-account deficit without compromising economic growth. Because around 60 percent of this deficit is generated by net energy imports, improving energy efficiency must be a priority. Turkey should also improve its efforts to attract foreign direct investment, which is a much more stable and value-adding source of financing than inflows of short-term external capital.
In the long term, Turkey has strong fundamentals that should continue to power economic growth well after the current volatility has abated. These advantages include the following:
Turkey still needs to make several structural improvements in order to fully leverage these advantages and facilitate growth. The following should be top priorities for the government: