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Special Issue: Turkey

20/12/2021 - Reports

Southeastern Europe and Mediterranean Emerging Market Economies; --Weekly Report

Turkey’s recurrent currency crises and its boom-bust growth model

  • Turkey's economic overperformance over the past decade has been largely driven by an accommodative monetary policy
  • However, this seemingly robust performance has come at the cost of a surge in inflation
  • Meanwhile, external imbalances persist, keeping Turkey highly dependent on external financing, the quality of which has been progressively deteriorating
  • Overtime, FX financing fell short of covering Turkey's FX needs, keeping the TRY on a steady depreciation path and eroding external buffers
  • In view of Turkey's vulnerabilities, the recent easing delivered by the CBRT has significantly further shaken confidence, dealing a fresh blow to the TRY
  • Although the CBRT has signalled that it would remain on hold for the time being, we believe that Turkey's risk premium and market volatility is unlikely to ease, unless the vicious cycle of weakening TRY, rising inflation and increasing dollarization is effectively broken