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Turkey struggles in search for sustainability

There’s a new buzzword from Ankara to Istanbul in Turkey’s financial markets: sustainability. Not of the environmental kind, but borne of a desire to keep the positive developments of the country’s economy, and its banks, flowing.

Turkey has been the poster child of emerging markets banking for some time. A country that has been able to sustain solid growth throughout the financial crisis with inflation under control has tempted buyers for its banks and securities. Questions are now being asked about the sustainability of some of its financial ratios, especially about its ability to finance a high current-account deficit. More than that, political risk remains a concern, in spite of the recent election of Recep Tayyip Erdogan as president in August. The fragility of sentiment was stressed by one bank that went so far as to say that “risk appetite tanked” in the pre-election period. This remains an issue as more elections are due over the course of the next year. Middle East political instability, in particular in Turkey’s neighbour Iraq, blights some investors’ positive outlook for Turkey.

On the economic front, managing US tapering presents a strategic challenge to Turkey’s authorities, in particular their handling of lira interest rates.

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