A balanced budget or “fiscal discipline” used to be the shiniest side of Turkey’s economic showcase to foreign investors. Over the past two years, however, the showcase has gotten dusty and scratched. The budget deficit has reached 2% of gross domestic product (GDP), double what it used to be, and it could climb further to 3% of GDP if measures are not taken. For Turkey, the budget deficit comes atop a chronic current account deficit. The simultaneous increase of the two — known as a “twin deficit” — is seen as a sign of growing risks that deter foreign investors, who are of crucial importance for Turkey.
The Turkish economy relies heavily on short-term portfolio investments, or “hot money.” The road map the US Federal Reserve laid out on Sept. 20 makes emerging economies like Turkey less attractive to short-term investors, and the Turkish currency has already weakened. The dollar, which was worth about 3.4 Turkish liras at the end of August, traded for more than 3.55 Turkish liras at the end of September.
