Wobbling but still on its feet: the Turkish economy in the global financial crisis

Abstract

This paper examines the Turkish economy in a world of current global financial crisis. It shows that Turkey’s key economic strengths include relatively prudent fiscal balances and a resilient banking sector. Key economic weaknesses include non-financial private sector foreign debt rollover risk, substantial household indebtedness where the unemployment rate is rising, an overvalued Turkish lira with its potential for rapid depreciation, and contracted growth and demand for Turkish imports. Turkey needs formal and informal institutional flexibility to prioritise social welfare spending and fixed capital investments by the public sector, rather than an exclusive preoccupation with price stability via monetary and fiscal discipline.