WIIW The Vienna Institute for International Economic Studies - Wiener Institut für Internationale Wirtschaftsvergleiche

TURKEY
Turkey is in the thrall of a renewed emerging markets volatility; in fact Turkey is one of the two economies most strongly affected by it (the other one being Argentina). The higher vulnerability of Turkey which shows up in a reversal of foreign capital flows and strong pressures on the exchange rate is the result of a history of high current account deficits, relatively low reserves, a delayed response by the Turkish Central Bank (TCB) to increase interest rates and the relatively short-term nature of foreign loans taken up over the recent period. wiiw expects the recent vigorous response by the Turkish Central Bank, which increased interest rates by roughly 400-500bp, to reduce the 2014 growth rate of GDP to 2.2% and then a gradual return to the longer-run potential growth path of 4.5% by 2016. The significant devaluation will improve the current account balance but impact negatively on inflation, which will remain higher than the TCBs target rate.