With equity markets in advanced economies treading water and low-risk bonds offering piddling interest, it's not surprising that investors have rushed back to emerging markets. And where better to go than to Turkey, whose economy briskly rebounded from a nasty recession in 2009 to clock Asian-style growth exceeding 8 percent in both 2010 and 2011?
Where, indeed. The transition economies in central Europe have not grown even half as fast as Turkey in recent years. And while a handful of economies in the Middle East and North Africa managed to get their acts together in the last decade or two, geopolitical risk in the wake of the Arab Spring has left investors in pause mode.
But with 2012 isn't looking much like 2010 or 2011there's good reason to believe that Turkey is losing its Midas touch. The economy grew at an annual rate 2.9 percent in the second quarter of this year. And while that figure is respectable in light of the sagging European economy -- the European Union is Turkey's largest foreign market -- it was well below consensus expectations.
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Those looking on the bright side point to the 20 percent rise in exports in the quarter. But it was driven by soaring gold sales to Iran, which is scrambling to acquire untraceable liquid assets in order to survive the Western economic embargo -- and is therefore not sustainable. Indeed, without the gold windfall, Turkey might well have slipped into recession.
This decidedly mixed economic news is forcing analysts to take a closer look at Turkey's economic fundamentals. And what they're seeing are weaknesses that have long lurked behind the curtain. Turkey's oversized current account deficit -- 10 percent of GDP in the boom years -- makes the economy dangerously dependent on the mood of foreign investors. Meanwhile, inflation remains stubbornly high, threatening to climb into double-digit territory again.
To better understand the Turkish growth story, go back to the banking crisis in 2001, which proved to be an effective wake-up call. With the help of a massive loan from the IMF, Economic Affairs Minister Kemal Dervis -- an outsider finishing a two-decade career at the World Bank -- pushed through a host of reforms ranging from commercial bank restructuring and central bank autonomy to the elimination of restrictions on foreign direct investment (FDI). And when the currently-ruling Justice and Development Party (AKP) came to power a year later, it continued along the lines laid out by Dervis and the IMF. Thus while AKP (and its leader Recep Tayyip Erdogan) would like to take credit for the economy's success in the last decade, its real achievement was to have the sense not to rock the boat built by Dervis.