Turkey's Economy Still Booming, But Challenges Remain

For the first time in its modern history, Turkey has resisted a serious global economic crisis, and also has decoupled itself from the rest of Europe by rebounding strongly in 2010. Although Turkey's economy is booming, however, the new government has some urgent matters to address.

When it first came into power in 2002, the Justice and Development Party, or AKP, faced a devastating financial crisis.

To prop up Turkey's economy, the International Monetary Fund supported an economic program for the country that it followed for nearly a decade, transforming Turkey into an economic tiger.

Now, with the AKP once again at the helm, the priorities of the new government will be to implement policies to address the new economic challenges it faces.

There are growing concerns that with the economy growing at 9 percent annually, there is a chance of it overheating, with inflation starting to rear its head. Also of concern is a skyrocketing deficit, running at nearly 8 percent of GDP [gross domestic product].

Emre Yigit is chief economist for the Istanbul-based trading house Global Securities. He said while the current deficit is not too threatening, it eventually could spin out of control.

"Turkey needs to borrow not less than probably $10 billion a month," said Yigit. "It's a testament to the strength of the Turkish economy and peoples' confidence in it, both at home and abroad, that this in fact has been going on more or less for years and nobody seems to be caring too much. But eventually chickens do come home to roost."

The global financial markets have been clamoring for the Turkish central bank to raise interest rates to dampen Turkish consumers' demand for imports. But the central bank fears that would result in a surge of new money being injected into the economy, driving up the value of the Turkish lira and resulting in even more imports being bought.

As a result, the government has been curtailing demand by increasing the amount of money that banks keep in their reserves, reducing the amount they can lend to consumers.

This approach is making markets increasingly nervous, especially with what is going on in Greece.

Inan Demir, chief economist for Finance Bank, said time may be running out for Turkey.

"I am more inclined to give the Turkish central bank the benefit of the doubt," said Demir. "But given that global uncertainties are escalating once again, the international markets - with their bout of risk aversion that we are seeing right now if it turns into something more generalized - might just not be that patient."

The problems facing the Turkish economy also reveal fundamental structural problems that need to be addressed.

Cengiz Aktar, a political scientist at Bahcesehir University, said, "This is not sustainable. It will need cash from abroad. Turkey has a zero savings rate. It needs foreign direct investment. It needs to import in order to export. I am afraid this happiness chain may break unless there is no fundamental and macro decisions."

By Western standards, many parts of Turkey remain poor. Much of Anatolia, the rural eastern region, bears no resemblance to the glitter of Istanbul and the western coast. Still, Turkey's economic expansion has brought the prospect of a First World future closer than ever. The question is, for how long?