Turkey's prime minister Recep Tayyip Erdogan has become the first leader of his country to win a third successive election victory. His Justice and Development Party (AKP) took 50% of the vote and retained its absolute majority in parliament in last Sunday's election.
Erdogan won because his excellent record on the economy eclipsed "concerns over what some see as [his] growing fondness for authoritarian tactics", said Economist.com. Since 2002, GDP per head has almost doubled and exports have tripled. Markets were reassured by the victory, added Murat Ucer on FT.com. They are dealing with "one of the most able and pragmatic governments in Turkey's history". Still, it now faces a major challenge.
The trouble is that the economy, which grew by 9% last year, is overheating, increasing the danger of a hard landing. Inflation has jumped to 7.2%. Domestic lending is "spiralling", said Lex in the FT. Credit growth hit 36% year-on-year in April. This is funding a consumption binge on imports, up 44% year-on-year in the first four months of 2011. Meanwhile, exports only rose by 21%.
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This helps to explain why Turkey's current account deficit is set to hit 9% of GDP by the end of the year. This huge deficit with the rest of the world is being plugged largely by short-term capital flows rather than long-term foreign direct investment. The hot money filling the deficit could easily turn tail if there is an external shock or a major swing in sentiment against risky assets. So the economy is "vulnerable to an abrupt correction", said Lex. Higher interest rates attract more hot money into the country, so the government will also need to clamp down on spending in order to reduce demand and cool activity. A possible problem is that Erdogan's need to make concessions to the opposition to secure constitutional reform could dilute efforts to tighten fiscal policy, as Capital Economics pointed out. Let's hope not, said the FT. Preventing a hard landing will require "prompt action".
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